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”, “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, 2025. 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, the impact of tariffs or trade policies, 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. 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, 2025.
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, 2025 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, 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, 2025.
Recent trends affecting our financial performance
As of December 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. 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.
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Results of Operations
Overview of the three months ended December 31, 2025
The following table details our results of operations in dollars and as a percentage of sales for the three months ended December 31, 2025 and 2024:
%
%
December 31, 2025
of sales
December 31, 2024
of sales
(Dollar amounts in thousands)
Sales
$
12,036
100
%
$
15,670
100
%
Costs and expenses:
Cost of sales
7,301
61
%
11,106
71
%
Research and development
858
7
%
786
5
%
Selling, general and administrative
3,989
33
%
4,132
26
%
Total costs and expenses
12,148
101
%
16,024
102
%
Operating loss
(112)
(1)
%
(354)
(2)
%
Other income, net
483
4
%
711
4
%
Income before income taxes
371
3
%
357
2
%
Income tax expense (benefit)
280
2
%
(115)
(1)
%
Net income
$
91
1
%
$
472
3
%
Sales
Our sales decreased by approximately $3.7 million, or 23%, to $12.0 million for the three months ended December 31, 2025 as compared to $15.7 million for the three months ended December 31, 2024.
TS segment sales change was as follows for the three months ended December 31, 2025 and 2024:
December 31,
Increase (decrease)
2025
2024
$
%
(Dollar amounts in thousands)
Products
$
6,494
$
10,933
$
(4,439)
(41)
%
Services
4,689
4,307
382
9
%
Total
$
11,183
$
15,240
$
(4,057)
(27)
%
TS segment total sales decreased $4.1 million for the three months ended December 31, 2025 when compared to the same prior year period. Product sales decreased $4.4 million primarily due to the U.S. division because several large orders did not reoccur in the current year. Service sales for the three months ended December 31, 2025 increased $0.4 million from the same prior year period, which is attributable to the U.S. division. The increase in service sales was due to increased third party maintenance sales of $0.3 million and increased managed services of $0.3 million, partially offset by decreased internal services and third-party services of $0.2 million.
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HPP segment sales change was as follows for the three months ended December 31, 2025 and 2024:
December 31,
Increase
2025
2024
$
%
(Dollar amounts in thousands)
Products
$
207
$
82
$
125
152
%
Services
646
348
298
86
%
Total
$
853
$
430
$
423
98
%
The HPP product sales increased by $0.1 million for the three months ended December 31, 2025 as compared to the same prior year period primarily as a result of increased Myricom and Multicomputer product sales. The HPP service sales increased by $0.3 million due to increased Multicomputer repair sales compared to the same prior year period.
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, 2025 and 2024:
December 31,
Increase (decrease)
2025
%
2024
%
$
%
(Dollar amounts in thousands)
Americas
$
11,518
95
%
$
15,484
99
%
$
(3,966)
(26)
%
Europe
70
1
%
181
1
%
(111)
(61)
%
APAC and Africa
448
4
%
5
—
%
443
8,860
%
Totals
$
12,036
100
%
$
15,670
100
%
$
(3,634)
(23)
%
The $4.0 million decrease in sales to the Americas was primarily the result of a decrease in the TS segment’s U.S. division of $3.9 million and U.K. division of $0.1 million. The $0.1 million decrease in sales to Europe was primarily the result of decreased sales by our TS segment’s U.K. division. The sales to APAC and Africa increased $0.4 million due to increased sales in the HPP segment.
Gross Margins
Our gross margin ("GM") increased $0.2 million for the three months ended December 31, 2025 as compared to the same prior year period. The GM as a percentage of sales increased to 39% for the three months ended December 31, 2025 as compared to the same prior year period of 29%.
December 31,
2025
2024
Increase (decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
TS
$
4,116
37
%
$
4,349
29
%
$
(233)
8
%
HPP
619
73
%
215
50
%
404
23
%
Total
$
4,735
39
%
$
4,564
29
%
$
171
10
%
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The impact of product mix within our TS segment on gross margin for the three months ended December 31, 2025 and 2024 was as follows:
December 31,
2025
2024
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
1,222
19
%
$
1,836
17
%
$
(614)
2
%
Services
2,894
62
%
2,513
58
%
381
4
%
Total
$
4,116
37
%
$
4,349
29
%
$
(233)
8
%
The overall TS segment GM as a percentage of sales increased to 37% for the three month period ended December 31, 2025 compared to the same prior year period of 29%. Product GM as a percentage of product sales increased to 19% for the three months ended December 31, 2025 compared to the 17% in the prior year period. This was primarily due to several large sales in the prior year period with a lower margin, which did not reoccur in the current year period. Service GM as a percentage of service sales increased to 62% for the three months ended December 31, 2025 compared to the same prior year period of 58% 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 service sales. In addition, managed services revenue increased while the cost of sales did not increase in proportion which caused an increase in GM as a percentage of service sales.
The impact of product mix within our HPP segment on gross margin for the three months ended December 31, 2025 and 2024 was as follows:
December 31,
2025
2024
Increase
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
Products
$
197
95
%
$
60
73
%
$
137
22
%
Services
422
65
%
155
45
%
267
20
%
Total
$
619
73
%
$
215
50
%
$
404
23
%
The overall HPP segment GM as a percentage of sales increased to 73% for the three months ended December 31, 2025 from 50% for the three months ended December 31, 2024. The 22% increase in product GM as a percentage of product sales for the three months ended December 31, 2025 compared to the same prior year period is primarily due to recognition of Multicomputer software license sales and Myricom hardware sales, both which have a high GM. The hardware was nearly all profit as the Company had an an impairment expense on the inventory in a prior year period meaning there was not an expense in the current year as a result of the sale. The 20% increase in service GM as a percentage of services revenue from the prior year was due to increased Multicomputer repairs, which are relatively high margin compared to other services revenue.
Research and Development Expenses
The research and development expenses incurred by our HPP segment increased $0.1 million for the three months ended December 31, 2025 to $0.9 million when compared to the prior year period due to increased labor expenses. The current period expenses were primarily for research 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 December 31, 2025 and 2024:
Three months ended December 31,
$
%
% of
% of
2025
Total
2024
Total
Decrease
Decrease
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
2,955
74
%
$
3,030
73
%
$
(75)
(2)
%
HPP segment
1,034
26
%
1,102
27
%
(68)
(6)
%
Total
$
3,989
100
%
$
4,132
100
%
$
(143)
(3)
%
SG&A expenses of $4.0 million for the three months ended December 31, 2025 decreased approximately $0.1 million compared to the same prior year period. The TS segment G&A expenses decreased by $0.1 million primarily due to decreased stock compensation expense when compared to the prior year period. The HPP segment SG&A expenses decreased $0.1 million for the three months ended December 31, 2025 as compared to the prior year period primarily due to decreased stock compensation expense and decreased recruiting expense.
Other Income/Expenses
The following table details Total other income, net for the three months ended December 31, 2025 and 2024:
Three months ended
December 31, 2025
December 31, 2024
$ Change
(Amounts in thousands)
Foreign exchange (loss) gain
$
(7)
$
295
$
(302)
Interest expense
(128)
(77)
(51)
Interest income
601
489
112
Other income, net
17
4
13
Total other income, net
$
483
$
711
$
(228)
The $0.2 million decrease in Total other income, net for the three months ended December 31, 2025 as compared to the same prior year period is primarily due to the current year period having a slight Foreign exchange loss compared to a Foreign exchange gain in the prior year period, partially offset by increased interest income.
In consolidation, U.S. dollars and Euros are remeasured into the functional currency, British Pounds, of our U.K. subsidiary. This non-cash remeasurement is included in Foreign exchange (loss) gain on the income statement and the foreign exchange amount is primarily from the U.S. Dollar bank account. The U.S. dollar slightly weakened relative to the British Pound for the three months ended December 31, 2025 causing a slight foreign exchange loss compared to the same prior year period where the U.S. dollar strengthened causing a foreign exchange gain.
The Interest income increase of $112 thousand for the three months ended December 31, 2025 as compared to the prior year period is primarily due to higher interest income from financing sales in our TS U.S. division of $201 thousand. Since the second quarter of fiscal year 2024 there has been an increase in customers requesting financing primarily for hardware, software, and third party-maintenance, which has resulted in increased interest income. This increase in interest income was partially offset with a decrease of $89 thousand of interest income primarily from our Cash and cash equivalents from a decreased average cash balance when compared to the prior year combined with a decrease in interest rates.
The Interest expense increase of $51 thousand for the three months ended December 31, 2025 as compared to the prior year period is related to increased multi-year agreements in the TS US division with vendors when also entering into some of the multi-year financing contracts the Company enters into with customers. Some vendors do not offer financing
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on purchases. If the vendor does offer financing, the Company determines if it will enter into an agreement based on various factors including interest rate offered. 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.
Income Taxes
Income tax expense of $280 thousand was recorded for the three months ended December 31, 2025 compared to an income tax benefit of $115 thousand in the same period of 2024. For the three months ended December 31, 2025, 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, the change in valuation allowance maintained against certain state tax credits, and non-deductible executive compensation. For the three months ended December 31, 2024, 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.
On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (“OBBBA”) into law. Key corporate tax provisions include the restoration of 100% bonus depreciation, immediate expensing for domestic research and experimental expenditures, changes to Section 163(j) interest limitations, and expanded Section 162(m) aggregation requirements. In accordance with ASC 740, the effects of the new tax law will be recognized in the period of enactment. The legislation has multiple effective dates, with certain provisions effective in 2025 and others to be implemented through 2027. We have evaluated the impact of the OBBBA and determined that it did not have a material effect on the Company’s financial statements for the three months ended December 31, 2025. We will continue to assess the implications of the OBBBA as further guidance becomes available but do not expect the legislation to have a material impact on the effective tax rate in future periods.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents and our line of credit.
Cash and cash equivalents decreased by $2.5 million to $24.9 million as of December 31, 2025 from $27.4 million as of September 30, 2025.
The following is a summary of our cash flows for the three months ended December 31, 2025 and 2024:
Three months ended December 31,
2025
2024
(Dollar amounts in thousands)
Net cash provided by (used in):
Operating activities
$
(2,916)
$
1,741
Investing activities
(105)
(47)
Financing activities
533
(1,587)
Effect of exchange rate changes on cash
(2)
(38)
(Decrease) increase in Cash and cash equivalents
$
(2,490)
$
69
Operating Activities
Cash used in operating activities decreased $4.7 million for the three months ended December 31, 2025 compared to the same prior year period. The changes from the prior year are primarily related to decreased Accounts payable and accrued expenses of $3.6 million, decreased Financing receivables of $2.4 million, increased inventories of $1.3 million, an increase in pension liabilities of $0.7 million. The remaining differences are primarily related to timing differences in operating assets and liabilities.
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Investing Activities
Cash used in investing activities was $105 thousand for the three months ended December 31, 2025 compared to $47 thousand used in investing activities for the prior year. The increase in cash used from the prior year is related purchases of property, equipment, and improvements.
Financing Activities
Cash provided by financing activities was $0.5 million for the three months ended December 31, 2025 compared to $1.6 million used in financing activities for the prior year period. The primary difference was the timing in the net borrowing on the line-of-credit.
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 $5.0 million as of December 31, 2025, which consisted of 0.4 million British Pounds, 0.7 million Euros, and 3.7 million U.S. Dollars. 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. pension.
As of December 31, 2025 and September 30, 2025, 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 $13.6 million and $14.1 million were available as of December 31, 2025 and September 30, 2025, respectively. As of December 31, 2025 and September 30, 2025 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 Condensed Consolidated Balance Sheets as Financing receivables, net of allowances and Financing receivables due after one year, net of allowances. In the year from December 31, 2025 we are scheduled to receive $8.8 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 Condensed Consolidated Balance Sheets in Accounts payable and accrued expenses and Other noncurrent liabilities payables (long-term portion in other noncurrent liabilities). In the year from December 31, 2025 we are scheduled to pay $4.7 million related to the vendor financing agreements.
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.
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.