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EX-31.1 - EX-31.1 - CSP INC /MA/cspi-20210331ex3115a3dc1.htm

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended           March 31, 2021

or

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number 0-10843


CSP Inc.

(Exact name of Registrant as specified in its charter)


Massachusetts

04-2441294

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

175 Cabot Street - Suite 210, Lowell, MA

01854

(Address of principle executive offices)

(Zip Code)

(978)-954-5038

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  .

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CSPI

Nasdaq Global Market

As of May 5, 2021, the registrant had 4,393,966 shares of common stock issued and outstanding.


INDEX

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets (unaudited) as of March 31, 2021 and September 30, 2020

3

Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2021 and 2020

4

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended March 31, 2021 and 2020

5

Consolidated Statement of Shareholders’ Equity (unaudited) for the three and six months ended March 31, 2021 and 2020

6

Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2021 and 2020

8

Notes to Consolidated Financial Statements (unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 4.

Controls and Procedures

35

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

36

Item 6.

Exhibits

36


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

March 31, 

September 30,

    

2021

    

2020

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

20,397

$

19,264

Accounts receivable, net of allowances of $219 and $181

 

15,168

 

13,362

Investment in lease, net-current portion

 

162

 

336

Inventories

 

4,221

 

5,285

Refundable income taxes

 

1,229

 

807

Other current assets

 

3,600

 

2,535

Total current assets

 

44,777

 

41,589

Property, equipment and improvements, net

 

891

 

1,047

Operating lease right-of-use assets

1,686

2,014

Intangibles, net

 

23

 

28

Investment in lease, net-less current portion

 

47

 

81

Long-term receivable

7,818

 

3,642

Deferred income taxes

 

 

1,149

Cash surrender value of life insurance

 

4,079

 

3,948

Other assets

 

99

 

147

Total assets

$

59,420

$

53,645

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

10,145

$

8,523

Line of credit

1,190

1,573

Notes payable - current portion

739

1,613

Deferred revenue

 

1,402

 

947

Pension and retirement plans

 

313

 

321

Total current liabilities

 

13,789

 

12,977

Pension and retirement plans

 

6,834

 

6,471

Notes payable - noncurrent portion

1,032

2,485

Operating lease liabilities - noncurrent portion

1,074

1,390

Income taxes payable

 

586

 

586

Other noncurrent liabilities

 

5,304

 

202

Total liabilities

 

28,619

 

24,111

Shareholders’ equity:

 

  

 

  

Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,394 and 4,276 shares, respectively

 

44

 

43

Additional paid-in capital

 

17,605

 

16,994

Retained earnings

 

24,796

 

24,492

Accumulated other comprehensive loss

 

(11,644)

 

(11,995)

Total shareholders’ equity

 

30,801

 

29,534

Total liabilities and shareholders’ equity

$

59,420

$

53,645

See accompanying notes to unaudited consolidated financial statements.

3


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except for per share data)

For the three months ended

For the six months ended

March 31, 

March 31, 

March 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

Sales:

 

  

 

  

  

 

  

 

Product

$

10,976

$

13,146

$

19,384

$

26,705

Services

 

3,112

 

3,737

 

6,092

 

7,036

Total sales

 

14,088

 

16,883

 

25,476

 

33,741

Cost of sales:

 

  

 

  

 

  

 

  

Product

 

8,553

 

11,033

 

15,502

 

22,637

Services

 

1,167

 

1,367

 

2,228

 

2,590

Total cost of sales

 

9,720

 

12,400

 

17,730

 

25,227

Gross profit

 

4,368

 

4,483

 

7,746

 

8,514

Operating expenses:

 

  

 

  

 

  

 

  

Engineering and development

 

762

 

716

 

1,491

 

1,388

Selling, general and administrative

 

3,727

 

3,910

 

6,913

 

7,671

Total operating expenses

 

4,489

 

4,626

 

8,404

 

9,059

Operating loss

 

(121)

 

(143)

 

(658)

 

(545)

Other income (expense):

 

  

 

  

 

  

 

  

Foreign exchange (loss) gain

 

(154)

 

479

 

(621)

 

144

Interest expense

 

(75)

 

(55)

 

(113)

 

(112)

Interest income

 

133

 

163

 

231

 

336

Gain on forgiveness of debt

2,196

Other income (expense)

 

93

 

(7)

 

102

 

4

Total other income (expense)

 

(3)

 

580

 

1,795

 

372

(Loss) income before income taxes

(124)

 

437

1,137

 

(173)

Income tax expense

723

 

1,169

833

 

1,099

Net (loss) income

$

(847)

$

(732)

$

304

$

(1,272)

Net (loss) income attributable to common stockholders

$

(847)

$

(732)

$

289

$

(1,272)

Net (loss) income per share – basic

$

(0.20)

$

(0.18)

$

0.07

$

(0.32)

Weighted average shares outstanding – basic

 

4,158

 

4,036

 

4,117

 

3,999

Net (loss) income per share – diluted

$

(0.20)

$

(0.18)

$

0.07

$

(0.32)

Weighted average shares outstanding – diluted

 

4,158

 

4,036

 

4,202

 

3,999

See accompanying notes to unaudited consolidated financial statements.

4


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

For the three months ended

For the six months ended

March 31, 

March 31, 

March 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

Net (loss) income

$

(847)

 

$

(732)

$

304

 

$

(1,272)

Foreign currency translation gain (loss) adjustments

 

49

 

(302)

 

351

 

24

Total comprehensive (loss) income

$

(798)

 

$

(1,034)

$

655

 

$

(1,248)

See accompanying notes to unaudited consolidated financial statements.

5


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three and six months ended March 31, 2021 and 2020:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended March 31, 2020:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of December 31, 2019

 

4,154

$

42

$

15,940

$

26,083

$

(12,267)

$

29,798

Net loss

 

 

 

 

(732)

 

 

(732)

Other comprehensive loss

 

 

 

 

 

(302)

 

(302)

Purchase of common stock

 

(6)

 

 

(43)

 

 

(43)

Stock-based compensation

 

 

 

250

 

 

 

250

Restricted stock issuance

 

97

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

9

110

110

Cash paid on common stock ($0.15 per share)

 

 

 

 

(640)

 

 

(640)

Balance as of March 31, 2020

 

4,254

$

43

$

16,300

$

24,668

$

(12,569)

$

28,442

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended March 31, 2021:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of December 31, 2020

 

4,276

$

43

$

17,259

$

25,643

$

(11,693)

$

31,252

Net loss

 

 

 

 

(847)

 

 

(847)

Other comprehensive gain

 

 

 

 

 

49

 

49

Stock-based compensation

 

 

 

240

 

 

 

240

Restricted stock issuance

 

103

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

15

 

 

106

 

 

 

106

Balance as of March 31, 2021

 

4,394

$

44

$

17,605

$

24,796

$

(11,644)

$

30,801

See accompanying notes to unaudited consolidated financial statements.

6


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three and six months ended March 31, 2021 and 2020:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the six months ended March 31, 2020:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of September 30, 2019

 

4,154

$

42

$

15,733

$

27,246

$

(12,593)

$

30,428

Net loss

 

 

 

 

(1,272)

 

 

(1,272)

Other comprehensive gain

 

 

 

 

 

24

 

24

Exercise of stock options

 

 

 

2

 

 

 

2

Stock-based compensation

 

 

 

455

 

 

 

455

Restricted stock issuance

 

97

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

9

 

 

110

 

 

 

110

Purchase of common stock

(6)

(43)

(43)

Cash dividends paid on common stock ($0.30 per share)

 

 

 

 

(1,263)

 

 

(1,263)

Balance as of March 31, 2020

 

4,254

$

43

$

16,300

$

24,668

$

(12,569)

$

28,442

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the six months ended March 31, 2021:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of September 30, 2020

 

4,276

$

43

$

16,994

$

24,492

$

(11,995)

$

29,534

Net income

 

 

 

 

304

 

 

304

Other comprehensive gain

 

 

 

 

 

351

 

351

Stock-based compensation

 

 

 

505

 

 

 

505

Restricted stock issuance

 

103

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

15

 

 

106

 

 

 

106

Balance as of March 31, 2021

 

4,394

$

44

$

17,605

$

24,796

$

(11,644)

$

30,801

See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the six months ended

March 31, 

March 31, 

    

2021

    

2020

Operating activities

 

  

 

  

Net income (loss)

$

304

$

(1,272)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

  

 

  

Depreciation

 

197

 

235

Amortization of intangibles

 

5

 

4

Loss on sale of fixed assets, net

9

Foreign exchange loss (gain)

 

621

 

(144)

Non-cash changes in accounts receivable

 

36

 

97

Non-cash changes in inventories

 

24

 

238

Non-cash lease expense

320

322

Stock-based compensation expense on stock options and restricted stock awards

 

505

 

455

Deferred income taxes

 

1,149

 

1,946

Increase in cash surrender value of life insurance

 

(61)

 

(51)

Non-cash other

68

Adjustment for financing activities recognized in net income - Gain on forgiveness of debt

(2,196)

Changes in operating assets and liabilities:

 

  

 

  

(Increase) decrease in accounts receivable

 

(1,824)

 

2,206

Decrease in inventories

 

1,043

 

1,149

Increase in refundable income taxes

 

(423)

 

(169)

Decrease (increase) in operating lease right-of-use assets

9

(2,131)

Increase in other assets

(1,005)

(473)

Decrease in investment in lease

 

208

 

178

(Increase) decrease in long-term receivable

(4,176)

176

Increase (decrease) in accounts payable and accrued expenses

 

1,701

 

(6,421)

(Decrease) increase in operating lease liabilities

(279)

2,076

Increase in deferred revenue

 

455

 

637

Increase in pension and retirement plans liabilities

 

31

 

18

Decrease in income taxes payable

 

 

(694)

Increase (decrease) in other long-term liabilities

 

5,100

 

(252)

Net cash provided by (used in) operating activities

 

1,812

 

(1,861)

Investing activities

 

  

 

  

Life insurance premiums paid

 

(70)

 

(144)

Purchases of property, equipment and improvements

 

(43)

 

(240)

Net cash used in investing activities

 

(113)

 

(384)

Financing activities

 

  

 

  

Dividends paid

 

 

(1,263)

Net payments under line-of-credit agreement

(382)

(874)

Proceeds from debt

2,037

Repayments on debt

(164)

(565)

Principal payments on finance leases

 

(173)

 

(157)

Purchase of common stock

(43)

Proceeds from issuance of shares under equity compensation plans

 

106

 

112

Net cash used in financing activities

 

(613)

 

(753)

Effects of exchange rate on cash

 

47

 

141

Net increase (decrease) in cash and cash equivalents

 

1,133

 

(2,857)

Cash and cash equivalents beginning of period

19,264

 

18,099

Cash and cash equivalents at end of period

$

20,397

$

15,242

Supplementary cash flow information:

 

  

 

  

Cash paid for income taxes

$

107

$

16

Cash paid for interest

$

100

$

154

Supplementary non-cash financing activities:

Gain on forgiveness of debt

$

2,196

$

See accompanying notes to unaudited consolidated financial statements.

8


CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021

Organization and Business

CSP Inc. ("CSPi" or "CSPI" or "the Company" or "we" or "our") was incorporated in 1968 and is based in Lowell, Massachusetts. CSPi and its subsidiaries develop and market IT integration solutions, advanced security products, managed IT services, purpose built network adapters, and high-performance cluster computer systems to meet the diverse requirements of its commercial and defense customers worldwide. The Company operates in two segments, its Technology Solutions (“TS”) segment and High Performance Products (“HPP”) segment.

1.            Basis of Presentation

The accompanying interim consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been omitted.

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited consolidated financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

Revision of Prior Period Financial Statements

During the preparation of the consolidated financial statements for the year ended September 30, 2020, we identified an immaterial error in the first three quarters of fiscal year 2020 related to the recognition of certain revenue as “net,” when in fact the revenue should have been recorded on a “gross” basis. As a result of evaluating the error, we determined the impact was not material to our financial statements in any prior interim period. However, management has revised the first three quarters of fiscal year 2020. The revised numbers for the three and six months ended March 31, 2020 are reflected in this Form 10-Q. The only financial statement affected was the Consolidated Statement of Operations. Specifically, financial statement line items Sales - Product, Sales - Services, and Cost of sales – product. Net income (loss) and gross profit did not change. Notes affected include Note 4 Revenue and Note 15 Segment Information.

For the three months ended March 31, 2020

For the six months ended March 31, 2020

As reported

Adjustment

As revised

As reported

Adjustment

As revised

Sales:

  

 

  

  

 

  

 

  

  

Product

$

12,296

$

850

$

13,146

$

25,518

$

1,187

$

26,705

Services

 

3,799

 

(62)

 

3,737

 

7,149

 

(113)

 

7,036

Total sales

 

16,095

 

788

 

16,883

 

32,667

 

1,074

 

33,741

Cost of sales:

 

  

 

  

 

  

 

  

 

  

 

  

Product

 

10,245

 

788

 

11,033

 

21,563

 

1,074

 

22,637

Services

 

1,367

 

 

1,367

 

2,590

 

 

2,590

Total cost of sales

 

11,612

 

788

 

12,400

 

24,153

 

1,074

 

25,227

Gross profit

$

4,483

$

$

4,483

$

8,514

$

$

8,514

Operating loss

$

(143)

$

$

(143)

$

(545)

$

$

(545)

Net loss

$

(732)

$

$

(732)

$

(1,272)

$

$

(1,272)

Net loss per share – basic

$

(0.18)

$

$

(0.18)

$

(0.32)

$

$

(0.32)

Net loss per share – diluted

$

(0.18)

$

$

(0.18)

$

(0.32)

$

$

(0.32)

9


2.            Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates and assumptions are related to reserves for bad debt, reserves for inventory obsolescence, the impairment assessment of intangible assets, right-of-use assets and lease liabilities, and the calculation of standalone selling price for revenue recognition, the calculation of liabilities related to deferred compensation and retirement plans and the calculation of income tax liabilities. Actual results may differ from those estimates under different assumptions or conditions.

3.            Recent Accounting Pronouncements

Accounting standards adopted in fiscal year 2021

In August 2018, the FASB issued Accounting Standard Update (“ASU”) No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, an amendment of the FASB Accounting Standards Codification. Under this ASU existing disclosures not considered cost beneficial are removed, disclosures identified as relevant are added, and there is added clarification regarding specific existing disclosures. For public entities, the new standard is effective for annual periods beginning after December 15, 2020. Beginning October 1, 2020, the Company adopted the ASU and it did not have a material impact on our consolidated financial statements. The disclosures will be expanded for the year ended September 30, 2021 as this standard does not affect interim disclosures.

New accounting standards not adopted as of March 31, 2021

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), an amendment of the FASB Accounting Standards Codification. This ASU will change how entities account for credit losses for most financial assets and certain other instruments. For trade receivables, loans and held-to-maturity debt securities entities will be required to estimate lifetime expected credit losses. For available-for-sale debt securities entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. Additionally, there will be a significant increase in the amount of disclosures by year of origination for certain financing receivables. For public entities classified as a smaller reporting company, the new standard is effective for annual periods beginning after December 15, 2022 (ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates), including interim periods within that annual period. The Company is evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

4.            Revenue

We derive revenue from the sale of integrated hardware and software, third-party service contracts, professional services, managed services, financing of hardware and software, and other services.

We recognize revenue from hardware upon transfer of control, which is at a point in time typically upon shipment when title transfers. Revenue from software is recognized at a point in time when the license is granted.

Professional services generally include implementation, installation, and training services. Professional services are considered a series of distinct services that form one performance obligation and revenue is recognized over time as services are performed.

Revenue generated from managed services is recognized over the term of the contract. Certain managed services contracts include financing of hardware and software. Revenues from arrangements which include financing are allocated considering relative standalone selling prices of lease and non-lease components within the agreement. The lease

10


component includes hardware, which is subject to ASC 842, Leases. The non-lease components are subject to ASC 606, Revenue from Contracts with Customers.

Other services generally include revenue generated through our royalty, extended warranty, multicomputer repair, and maintenance contracts. Royalty revenue is sales-based and recognized on date of subsequent sale of the product, which occurs on the date of customer shipment. Revenue from extended warranty contracts is recognized evenly over the period of the warranty. Multicomputer repair services revenue is recognized upon control transfer when the customer takes possession of the computer at time of shipping. Revenue generated from maintenance services is recognized evenly over the term of the contract.

Variable consideration is immaterial. The right of return risk lies with the original manufacturer of the product. Managed service contracts contain the right to refund if canceled within 30 days of inception. Any products with a standard warranty are treated as a warranty obligation under ASC 460, Guarantees.

The following policies are applicable to our major categories of segment revenue transactions:

TS Segment Revenue

TS Segment revenue is derived from the sale of hardware, software, professional services, third-party service contracts, maintenance contracts, managed services, and financing of hardware and software. Financing revenue pertaining to the portion of an arrangement containing a lease is recognized in accordance with ASC 842. Financing revenue related to the lease is recorded in revenue as equipment leasing is part of the Company’s operations.

Third-party service contracts are evaluated to determine whether such service revenue should be recorded as gross or net sales and whether over time or at point in time.

HPP Segment Revenue

HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multicomputer, Myricom, and ARIA product lines.

Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products’ functionality, and post contract maintenance and support. Post contract maintenance and support is considered immaterial in the context of the contract and therefore is not a separate performance obligation.

11


See disaggregated revenues below by products/services and geography.

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2021

Sales:

Product

$

716

$

241

$

10,012

$

10,253

$

10,969

Service

172

90

2,850

2,940

3,112

Finance *

7

7

7

Total sales

$

888

$

331

$

12,869

$

13,200

$

14,088

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

922

$

184

$

12,017

$

12,201

$

13,123

Service

553

84

3,100

3,184

3,737

Finance *

23

23

23

Total sales

$

1,475

$

268

$

15,140

$

15,408

$

16,883

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the six months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2021

Sales:

Product

$

1,892

$

1,644

$

15,830

$

17,474

$

19,366

Service

552

177

5,363

5,540

6,092

Finance *

18

18

18

Total sales

$

2,444

$

1,821

$

21,211

$

23,032

$

25,476

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the six months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

1,689

$

737

$

24,230

$

24,967

$

26,656

Service

827

210

5,999

6,209

7,036

Finance *

49

49

49

Total sales

$

2,516

$

947

$

30,278

$

31,225

$

33,741


*     Finance revenue is related to equipment leasing and is not subject to the guidance on revenue from contracts with customers (ASC 606).

12


Significant Judgments

The input method using labor hours expended relative to the total expected hours is used to recognize revenue for professional services. Only the hours that depict the Company’s performance toward satisfying a performance obligation are used for progress. An estimate for professional services is made at the beginning of each contract based on prior experience and monitored throughout the services. This method is most appropriate as it depicts the measure of progress towards satisfaction of the performance obligation.

A financing component exists when at contract inception the period between the transfer of a promised good and/or service to the customer differs from when the customer pays for the good and/or service. As a practical expedient, the Company has elected not to adjust the amount of consideration for effects of a significant financing component when it is anticipated the promised good or service will be transferred and the subsequent payment will be one year or less.

Certain contracts contain a financing component including managed services contracts with financing of hardware and software. The interest rate used reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement. Revenues from arrangements which include financing are allocated considering relative standalone selling prices of lease and non-lease components within the agreement. The lease component includes hardware, which is subject to ASC 842, Leases. The non-lease components are subject to ASC 606, Revenue from Contracts with Customers.

When product and non-managed services are sold together, the allocation of the transaction price to each performance obligation is calculated based on the estimated relative selling price or a budgeted cost-plus margin approach, as appropriate. Due to the complex nature of these contracts, there is significant judgment in allocating the transaction price. These estimates are periodically reviewed by project managers, engineers, and other staff involved to ensure estimates are appropriate. For items sold separately, including hardware, software, professional services, maintenance contracts, other services, and third-party service contracts, there is no allocation as there is one performance obligation.

We recognize revenue from third-party service contracts as either gross sales or net sales depending on whether the Company is acting as a principal party to the transaction or simply acting as an agent or broker based on control and timing. The Company is a principal if it controls the good or service before that good or service is transferred to the customer. We record revenue as gross when the Company is a principal party to the arrangement and net of cost when we are acting as a broker or agent for a third party. Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to revenue resulting in net sales equal to the gross profit on the transaction. Third-party service contracts are sold in different combinations with hardware, software, and services. When the Company is an agent, revenue is typically recorded at a point in time. When the Company is the principal, revenue is recognized over the contract term. We have concluded we are the agent in sales of third-party maintenance, software or hardware support, and certain security software that is sold with integral third-party delivered software maintenance that include critical updates.

Contract Assets and Liabilities

When the Company has performed work but does not have an unconditional right to payment, a contract asset is recorded. When the Company has the right to bill a customer, accounts receivable is recorded as an unconditional right exists. Current contract assets were $2.0 million and $1.0 million as of March 31, 2021 and September 30, 2020, respectively. The current portion is recorded in other current assets on the consolidated balance sheets.  There were no noncurrent contract assets as of March 31, 2021 and September 30, 2020. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before the Company transfers a good or service to the customer. Current contract liabilities were $1.4 million and $0.9 million as of March 31, 2021 and September 30, 2020, respectively. The current portion of contract liabilities is recorded in deferred revenue on the consolidated balance sheets. The long-term portion of contract liabilities were $0.1 million and $0.2 million as of March 31, 2021 and September 30,

13


2020, respectively. These noncurrent liabilities are recorded in other noncurrent liabilities. Revenue recognized for the six months ended that was included in contract liabilities as of the beginning of the period was $0.5 million.

Contract Costs

Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are equal to or less than a one year period, are expensed as incurred, utilizing the practical expedient in ASC 340-40-25-4. For a period greater than one year, incremental contract costs are capitalized if the Company expects to recover these costs. The costs are amortized over the contract term and expected renewal periods. The period of amortization is generally three to six years. Incremental costs are related to commissions in the TS portion of the business. Current capitalized contract costs are within the other current assets on the consolidated balance sheets as of March 31, 2021 and September 30, 2020. The portion of current capitalized costs were $106 thousand and $130 thousand as of March 31, 2021 and September 30, 2020, respectively. There are no noncurrent capitalized costs on the consolidated balance sheets as these commissions are paid annually even when the contract extends beyond a one year period. The amount of incremental costs amortized for the three months ended March 31, 2021 and 2020 were $84 thousand and $84 thousand, respectively. The amount of incremental costs amortized for the six months ended March 31, 2021 and 2020 were $171 thousand and $162 thousand, respectively. This is recorded in selling, general, and administrative expenses. There was no impairment related to incremental costs capitalized during the three and six months ended March 31, 2021.

Costs to fulfill a contract are capitalized when the costs are related to a contract or anticipated contract, generate or enhance resources that will be used in satisfying performance obligations in the future, and costs are recoverable. Costs to fulfill a contract are related to the TS portion of the business and involve activities performed before managed services can be completed. Current capitalized fulfillment costs are in the other current assets and noncurrent costs are in other assets on the consolidated balance sheets. The portion of current capitalized costs were $13 thousand as of March 31, 2021 and $13 thousand as of September 30, 2020. The portion of noncurrent capitalized costs were $16 thousand and $22 thousand as of March 31, 2021 and September 30, 2020, respectively. The amount of fulfillment costs amortized for three and six months ended March 31, 2021 were $3 thousand and $6 thousand, respectively. These costs amortized were recorded in cost of sales. The amount of fulfillment costs amortized for three and six months ended March 31, 2020 were $3 thousand and $6 thousand, respectively. These costs amortized were recorded in cost of sales. There was no impairment related to fulfillment costs capitalized.

Other

Projects are typically billed upon completion or at certain milestones. Product and services are typically billed when shipped or as services are being performed. Payment terms are typically 30 days to pay in full except in Europe where it could be up to 90 days. Most of the Company’s contracts are less than one year. There are certain contracts that contain a financing component. See Note 6 to the consolidated financial statements for additional information. The Company elected to use the optional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that have an original expected duration of one year or less. This is due to a low amount of performance obligations, which are less than one year from being unsatisfied at each period end. Most of these contracts are related to product sales.

The Company has certain contracts that have an original term of more than one year. The royalty agreement is longer than one year, but not included in the table below as the royalties are sales-based. Managed service contracts are generally longer than one year. For these contracts the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2021 is set forth in the table below:

    

(Amounts in thousands)

Fiscal 2021 (remaining 6 months)

$

830

Fiscal 2022

596

Fiscal 2023

211

Fiscal 2024

32

$

1,669

14


5.            Earnings Per Share of Common Stock

Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the assumed weighted average number of common shares outstanding.

We are required to present earnings per share (“EPS”), utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.

Basic and diluted earnings per share computations for the Company’s reported net loss attributable to common stockholders are as follows:

For the three months ended

For the six months ended

March 31, 

March 31, 

March 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

(Amounts in thousands except per share data)

Net income (loss)

 

$

(847)

  

$

(732)

 

304

  

(1,272)

 

Less: net income (loss) attributable to nonvested common stock

 

  

 

15

  

 

Net income (loss) attributable to common stockholders

$

(847)

  

$

(732)

$

289

  

$

(1,272)

Weighted average total shares outstanding – basic

 

4,158

  

 

4,036

 

4,326

  

 

3,999

Less: weighted average non–vested shares outstanding

 

  

 

 

209

  

 

Weighted average number of common shares outstanding – basic

 

4,158

  

 

4,036

 

4,117

  

 

3,999

Potential common shares from non–vested stock awards and the assumed exercise of stock options

 

  

 

 

85

  

 

Weighted average common shares outstanding – diluted

 

4,158

  

 

4,036

 

4,202

  

 

3,999

Net income (loss) per share – basic

$

(0.20)

  

$

(0.18)

$

0.07

  

$

(0.32)

Net income (loss) per share – diluted

$

(0.20)

  

$

(0.18)

$

0.07

  

$

(0.32)

Non-vested restricted stock awards of 218,000 shares were excluded from the diluted loss per share calculation for the three months ended March 31, 2021. Non-vested restricted stock awards of 204,000 and 197,000 shares were excluded from the diluted loss per share calculation for the three and six months ended March 31, 2020, respectively. These awards were excluded because there was a net loss for these periods and their inclusion would have been anti-dilutive.

6.            Accounts and Long-Term Receivable

Within accounts receivable and long-term receivable there are amounts due reflecting sales whose payment terms exceed one year. This financing is separate from agreements with a leasing component, see Note 8 Leases for financing through leases. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $6.0 million and $7.7 million as of March 31, 2021. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $2.3 million and $3.5 million as of September 30, 2020, respectively. There were two new agreements effective in the second quarter of fiscal year 2021 causing an increase in accounts and long-term receivable. These agreements included approximately $9.0 million of payments to be received over the next 4 years from March 31, 2021. It was determined we were acting as the agent in the transactions and recorded net revenue of approximately $0.5 million during the second quarter of fiscal year 2021. The receivables with a payment term exceeding one year carry an

15


average weighted interest rate of 4.8%, which reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement.

There is not an allowance for credit losses nor impairments for accounts and long-term receivables with a contractual maturity of over one year. All accounts have no past amounts due as of March 31, 2021 or September 30, 2020. There was no activity in the allowance for credit losses of these receivables for the six months ended March 31, 2021 and March 31, 2020, respectively. All these agreements are looked at as one portfolio in determining credit losses. There are various factors that are considered in extending a customer payment terms longer than one year including payment history, economic conditions, and capacity to pay. The credit quality of customers is monitored by payment activity. The unearned income represents a rate similar to market at the inception of the agreement.

The amount of interest income earned from sales whose payment terms exceed one year for the three months ended March 31, 2021 and 2020 was $126 thousand and $114 thousand, respectively. The amount of interest income earned from sales whose payment terms exceed one year for the six months ended March 31, 2021 and 2020 was $218 thousand and $230 thousand, respectively. Interest income from these agreements is recorded in Other income (expense), net on the Consolidated Statements of Operations.

Receivables whose payment terms exceed one year are placed on non-accrual status, meaning interest income stops being recorded, when the customer has a past due amount in excess of 30 days or reasonable doubt exists in collecting all interest and principal. A payment due in excess of 30 days is considered delinquent. If a payment is received for a receivable on non-accrual status the payment is first applied to interest and then principal. Recording interest income resumes once no reasonable doubt exists regarding collecting all interest and principal.

Contractual maturities of outstanding financing with an original contractual maturity over one year are as follows:

Fiscal year ending September 30:

    

(Amounts in thousands)

2021

$

4,628

2022

3,860

2023

2,983

2024

1,560

2025

1,560

Total payments

14,591

Less: unearned income

910

Total, net of unearned income

$

13,681

7.            Inventories

Inventories consist of the following:

March 31, 

September 30,

    

2021

    

2020

(Amounts in thousands)

Raw materials

$

890

$

574

Work-in-process

 

217

213

Finished goods

 

3,114

4,498

Total

$

4,221

$

5,285

16


8.     Leases

Information related to both lessee and lessor

The components of lease costs for the three months ended March 31, 2021 and 2020 are as follows:

Three months ended

Consolidated Statements of Operations Location

Consolidated Statements of Operations Location

March 31, 2021

March 31, 2020

(Amounts in thousands)

Finance Lease:

Interest on lease liabilities

Selling, general, and administrative

$

3

$

12

Operating Lease:

 

 

Operating lease cost

Selling, general, and administrative

 

180

 

181

Short-term lease cost

Selling, general, and administrative

10

3

Total lease costs

$

193

$

196

Less sublease interest income

Revenue

(7)

(23)

Total lease costs, net of sublease interest income

$

186

$

173

The components of lease costs for six months ended March 31, 2021 and 2020 are as follows:

Six months ended

Consolidated Statements of Operations Location

Consolidated Statements of Operations Location

March 31, 2021

March 31, 2020

(Amounts in thousands)

Finance Lease:

Interest on lease liabilities

Selling, general, and administrative

$

8

$

25

Operating Lease:

 

 

Operating lease cost

Selling, general, and administrative

 

368

 

361

Short-term lease cost

Selling, general, and administrative

13

6

Total lease costs

$

389

$

392

Less sublease interest income

Revenue

(18)

(49)

Total lease costs, net of sublease interest income

$

371

$

343

Supplemental cash flow information related to leases for three months ended March 31, 2021 and 2020 is below:

Three months ended

March 31, 2021

March 31, 2020

(Amounts in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

185

$

191

Operating cash flows from short-term leases

3

10

Operating cash flows from finance leases

3

12

Financing cash flows from finance leases

87

79

Lease assets obtained in exchange for new lease liabilities

Operating leases

Cash received from subleases

112

112

17


Supplemental cash flow information related to leases for six months ended March 31, 2021 and 2020 is below:

Six months ended

March 31, 2021

March 31, 2020

(Amounts in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

376

$

379

Operating cash flows from short-term leases

13

19

Operating cash flows from finance leases

8

25

Financing cash flows from finance leases

173

157

Lease assets obtained in exchange for new lease liabilities

Operating leases

4

Cash received from subleases

225

225

9. Accounts payable and other noncurrent liabilities

In February 2021, the Company’s US. division of the TS segment entered into an agreement with a vendor to pay approximately $1.5 million including interest for goods and services through fiscal year 2025 in 5 payments related to a multi-year agreement with a customer.

In February 2021, the Company’s US. division of the TS segment entered into an agreement with a vendor to pay approximately $7.2 million including interest for goods and services through fiscal year 2025 in 6 payments through fiscal year 2025 related to a multi-year agreement with a customer.

See Note 6 for further information related to the multi-year agreements above.

There was not an interest rate stated and therefore interest was imputed under ASC 835 Interest as the payments in the exchange represented two elements: principal and interest. The imputed interest rate for both agreements was determined to be 5.0%. The rate was determined primarily based on the rate the Company could obtain by financing from other sources at the date of the transaction.

The amounts owed for these agreements are in within accounts payable and other noncurrent liabilities because they are owed to a vendor rather than banks or financial institutions for borrowings. See Note 10 Notes Payable and Line of Credit for amounts due to banks and other financial institutions for borrowings.

Below are details of the agreements with the vendor that contain imputed interest:

March 31, 2021

(Amounts in thousands)

Current

$

2,727

Less: discount

288

Accounts payable and accrued expenses

$

2,439

Noncurrent

$

5,590

Less: discount

403

Other noncurrent liabilities

$

5,187

The Company had a total of approximately $8.1 million due to this vendor including the two aforementioned agreements and other payables. This is approximately 53% of Accounts payable and other noncurrent liabilities. The TS segment has many vendors it transacts with and does not have any specific agreement with this vendor that it must purchase certain products from the vendor. Management believes other suppliers could provide similar products on comparable terms.

18


10.     Notes Payable and Line of Credit

In September 2019, the Company borrowed $1.0 million with a 5.0% rate of interest related to a multi-year agreement with a customer. See Note 6 for the disclosure related to the receivables.

In October 2019, the Company borrowed $2.0 million with a 5.1% rate of interest related to a multi-year agreement with a customer.

On April 17, 2020, CSP, Inc. and Modcomp, Inc., its wholly owned subsidiary (collectively, the “Borrowers”) each received a loan in the form of a promissory note from Paragon Bank (“Lender”) in the amounts of $827,000 and $1,353,600, respectively (the “SBA Loans”) under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The SBA Loans have a two-year term and carry an annual fixed interest rate of 1%.

The SBA Loans provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, materially false or misleading representations to Lender or SBA, and adverse changes in the financial condition or business operations that Lender believed could materially affect Borrowers’ ability to pay the SBA Loans. The Borrowers did not provide any collateral or guarantees for the SBA Loans and the Borrowers could prepay the principal of the SBA Loans at any time without penalty.

The Borrowers applied to the Lender for forgiveness of an amount due on the SBA Loans in an amount equal to the sum of certain costs during the 24 week period beginning on the date of the first disbursement of the SBA Loans. The amount of SBA Loans forgiveness was calculated in accordance with the requirements of the PPP, including provisions of Section 1106 of the CARES Act. We used the SBA Loans proceeds in accordance with the applicable SBA guidelines. In November 2020 the SBA Loans were formally forgiven. The $2.2 million gain is displayed on the Consolidated Statement of Operations in the line item “Gain on forgiveness of debt.”

Interest expense related to the notes for the three months ended March 31, 2021 and 2020 was $23 thousand and $31 thousand, respectively. Interest expense related to the notes for the six months ended March 31, 2021 and 2020 was $46 thousand and $63 thousand, respectively. Below are details of the notes payable.

March 31, 2021

September 30, 2020

(Amounts in thousands)

Current

$

808

$

1,702

Less: notes discount

69

 

89

Notes payable - current portion

$

739

$

1,613

Noncurrent

$

1,077

$

2,559

Less: notes discount

45

 

74

Notes payable - noncurrent portion

$

1,032

$

2,485

As of March 31, 2021 and September 30, 2020, the Company maintained an inventory line of credit with a borrowing capacity of $15.0 million. It may be used by the TS and HPP segments in the U.S. to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. No interest accrues under the inventory line of credit when advances are paid within terms, however, late payments are subject to an interest charge of Prime plus 5%. The credit agreement for the inventory line of credit contains financial covenants which require the Company to maintain the following TS segment-specific financial ratios: (1) a minimum current ratio of 1.2, (2) tangible net worth of no less than $4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0:1. As of March 31, 2021 and September 30, 2020, Company borrowings, all from the TS segment, under the inventory line of credit were $1.2 million and $1.6 million, respectively, and the Company was in compliance with all financial covenants. As of March 31, 2021 and September 30, 2020 this line of credit also includes availability of a limited cash withdrawal of up to $1.0 million and $1.0 million, respectively. As of March 31, 2021 and September 30, 2020 there were no cash withdrawals outstanding.

19


11.            Pension and Retirement Plans

The Company’s operations have defined benefit and defined contribution plans in the U.K. and in the U.S. In the U.K., the Company provides defined benefit pension plans and defined contribution plans for some of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain former employees. The U.S. supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. The Company also provides for officer death benefits through post-retirement plans to certain officers of the Company in the U.S. All the Company’s defined benefit plans are closed to newly hired employees and have been since September 2009.

The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.

The Company’s pension plan in the U.K. is the only plan with plan assets. The plan assets consist of an investment in a commingled fund which in turn comprises a diversified mix of assets including corporate equity securities, government securities and corporate debt securities.

The components of net periodic benefit costs related to the U.S. and U.K. plans are as follows:

Three Months Ended March 31, 

2021

2020

    

U.K.

    

U.S.

    

Total

    

U.K.

    

U.S.

    

Total

(Amounts in thousands)

Pension:

Interest cost

$

61

$

2

$

63

$

66

$

4

$

70

Expected return on plan assets

 

(99)

 

 

(99)

 

(74)

 

 

(74)

Amortization of past service costs

2

2

2

2

Amortization of net gain

 

45

 

1

 

46

 

48

 

1

 

49

Net periodic benefit cost

$

9

$

3

$

12

$

42

$

5

$

47

Post Retirement:

 

  

 

  

 

  

 

  

 

  

 

  

Service cost

$

$

12

$

12

$

$

9

$

9

Interest cost

 

 

11

 

11

 

 

11

 

11

Amortization of net gain

 

 

12

 

12

 

 

6

 

6

Net periodic cost

$

$

35

$

35

$

$

26

$

26

Six Months Ended March 31, 

2021

2020

    

U.K.

    

U.S.

    

Total

    

U.K.

    

U.S.

    

Total

(Amounts in thousands)

Pension:

Interest cost

$

119

$

5

$

124

$

132

$

8

$

140

Expected return on plan assets

 

(196)

 

 

(196)

 

(148)

 

 

(148)

Amortization of past service costs

4

4

4

4

Amortization of net gain (loss)

 

89

 

2

 

91

 

96

 

2

 

98

Net periodic benefit cost

$

16

$

7

$

23

$

84

$

10

$

94

Post Retirement:

 

  

 

  

 

  

 

  

 

  

 

  

Service cost

$

$

23

$

23

$

$

19

$

19

Interest cost

 

 

22

 

22

 

 

23

 

23

Amortization of net loss

 

 

25

 

25

 

 

12

 

12

20


Net periodic cost

$

$

70

$

70

$

$

54

$

54

The fair value of the assets held by the U.K. pension plan by asset category are as follows:

Fair Values as of

March 31, 2021

September 30, 2020

Fair Value Measurements Using Inputs Considered as

Fair Value Measurements Using Inputs Considered as

Asset Category

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

(Amounts in thousands)

Cash on deposit

$

76

$

76

$

$

$

471

$

471

$

$

Pooled funds

 

11,097

 

11,097

 

 

9,269

 

9,269

 

Total plan assets

$

11,173

$

11,173

$

$

$

9,740

$

9,740

$

$

12.            Income Taxes

An income tax expense of $723 thousand was recorded for the three months ended March 31, 2021 compared to an income tax expense of $1.2 million in the same period of 2020. An income tax expense of $833 thousand was recorded for the six months ended March 31, 2021 compared to income tax expense of $1.0 million in the same period of 2020. The income tax expense for the three and six months ended March 31, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses incurred through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the six months ended March 31, 2020 reflected the recording of a valuation allowance against deferred tax assets during the second fiscal quarter, offset by the anticipated tax benefit from the carryback of net operating losses.

The provisions above are estimates, and accordingly, changes to these estimates will be recorded in subsequent periods as more information and guidance becomes available.

13.            Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

March 31, 

September 30,

    

2021

    

2020

(Amounts in thousands)

Cumulative effect of foreign currency translation

$

(4,345)

$

(4,696)

Cumulative unrealized loss on pension liability

 

(7,299)

 

(7,299)

Accumulated other comprehensive loss

$

(11,644)

$

(11,995)

14.          Fair Value of Financial Assets and Liabilities

Under the fair value standards fair value is based on the exit price and defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement should reflect all the assumptions that market participants would use in pricing an asset or liability. A fair value hierarchy is established in the authoritative guidance outlined in three levels ranking from Level 1 to Level 3 with Level 1 being the highest priority.

Level 1: observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly

21


Level 3: unobservable inputs (e.g., a reporting entity’s or other entity’s own data)

The Company had no assets or liabilities measured at fair value on a recurring (except our pension plan assets and whole life insurance policies, see Note 11 for pension plan assets) or non-recurring basis as of March 31, 2021 or September 30, 2020.

To estimate fair value of the financial instruments below, quoted market prices are used when available and classified within Level 1. If this data is not available, we use observable market-based inputs to estimate fair value, which are classified within Level 2. If the preceding information is unavailable, we use internally generated data to estimate fair value which is classified within Level 3.

As of March 31, 2021

As of September 30, 2020

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Fair Value Level

Reference

(Amounts in thousands)

Assets:

Cash and cash equivalents

$

20,397

$

20,397

$

19,264

$

19,264

1

Consolidated Balance Sheets

Accounts and long-term receivable*

13,681

13,681

5,839

5,839

3

Note 6

Liabilities:

Accounts payable and accrued expenses and other long-term liabilities*

7,626

7,626

3

Note 9

Notes payable

1,771

1,771

4,098

4,098

2

Note 10

*Original maturity over one year

Cash and cash equivalents

Carrying amount approximated fair value.

Accounts and long-term receivable with original maturity over one year

Fair value was estimated by discounting future cash flows based on the current rate with similar terms.

Accounts payable and accrued expenses and other long-term liabilities

Fair value was estimated by discounting future cash flows based on the current rate the Company could get in another transaction with similar terms based on historical information.

Notes Payable

Fair value was estimated based on quoted market prices.

Fair value of accounts receivable with an original maturity of one year or less and accounts payable was not materially different from their carrying values as of March 31, 2021 and September 30, 2020.

22


15.            Segment Information

The following tables present certain operating segment information for the three and six months ended March 31, 2021 and 2020.

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2021

Sales:

Product

$

716

$

241

$

10,019

$

10,260

$

10,976

Service

 

172

 

90

 

2,850

 

2,940

 

3,112

Total sales

$

888

$

331

$

12,869

$

13,200

$

14,088

Income (loss) from operations

$

(1,339)

$

(66)

$

1,284

$

1,218

$

(121)

Total assets

$

8,098

$

10,497

$

40,825

$

51,322

$

59,420

Capital expenditures

 

1

 

 

9

 

9

 

10

Depreciation and amortization

 

45

 

 

53

 

53

 

98

2020

 

  

 

  

 

  

 

  

 

  

Sales:

 

  

 

  

 

  

 

  

 

  

Product

$

922

$

184

$

12,040

$

12,224

$

13,146

Service

 

553

 

84

 

3,100

 

3,184

 

3,737

Total sales

$

1,475

$

268

$

15,140

$

15,408

$

16,883

Income (loss) from operations

$

(1,024)

$

(50)

$

931

$

881

$

(143)

Total assets

$

8,685

$

10,757

$

34,069

$

44,826

$

53,511

Capital expenditures

 

29

 

 

4

 

4

 

33

Depreciation and amortization

 

57

 

 

57

 

57

 

114

23


Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the six months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2021

Sales:

Product

$

1,892

$

1,644

$

15,848

$

17,492

$

19,384

Service

 

552

 

177

 

5,363

 

5,540

 

6,092

Total sales

$

2,444

$

1,821

$

21,211

$

23,032

$

25,476

Income (loss) from operations

$

(2,193)

$

(35)

$

1,570

$

1,535

$

(658)

Total assets

$

8,098

$

10,497

$

40,825

$

51,322

$

59,420

Capital expenditures

 

7

 

 

36

 

36

 

43

Depreciation and amortization

 

93

 

 

109

 

109

 

202

2020

 

  

 

  

 

  

 

  

 

  

Sales:

 

  

 

  

 

  

 

  

 

  

Product

$

1,689

$

737

$

24,279

$

25,016

$

26,705

Service

 

827

 

210

 

5,999

 

6,209

 

7,036

Total sales

$

2,516

$

947

$

30,278

$

31,225

$

33,741

Income (loss) from operations

$

(2,287)

$

(47)

$

1,789

$

1,742

$

(545)

Total assets

$

8,685

$

10,757

$

34,069

$

44,826

$

53,511

Capital expenditures

 

63

 

 

177

 

177

 

240

Depreciation and amortization

 

115

 

3

 

121

 

124

 

239

Income (loss) from operations consists of sales less cost of sales, engineering and development expenses, and selling, general and administrative expenses but is not affected by either other income/expense or by income taxes expense (benefit). Non-operating expenses/income consists principally of investment income, interest income from transactions with payment terms exceeding one year (see Note 6 for details), and interest expense. All intercompany transactions have been eliminated.

The following table lists customers from which the Company derived revenues of 10% or more of total revenues for the three and six months ended March 31, 2021 and 2020.

For the three months ended March 31, 

For the six months ended March 31, 

2021

2020

2021

2020

Customer

% of Total

Customer

% of Total

Customer

% of Total

Customer

% of Total

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

Revenues

    

(Amounts in millions)

Customer A

$

1.2

8

%

$

2.0

12

%

$

1.8

7

%

$

3.8

11

%

Customer A totaled approximately $13.0 million, or 56%, and approximately $4.7 million, or 28%, of total consolidated accounts receivable and long-term receivable as of March 31, 2021 and September 30, 2020, respectively. There were no other customers that were more than 10% of total consolidated accounts receivable and long-term receivable as of March 31, 2021. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with any customers as of March 31, 2021

24


Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The discussion below contains certain forward-looking statements including, but not limited to, among others, statements concerning future revenues and future business plans. Forward-looking statements include statements in which we use words such as “expect”, “believe”, “anticipate”, “intend”, “project”, “estimate”, “should”, “could”, “may”, “plan”, “potential”, “predict”, “project”, “will”, “would” and similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, the forward-looking statements are subject to significant risks and uncertainties, and thus we cannot assure you that these expectations will prove to have been correct, and actual results may vary from those contained in such forward-looking statements. We discuss many of these risks and uncertainties in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and in this Form 10-Q. 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 U.S. 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, the recent changes in the U.S. Tax laws, and the impact of the novel coronavirus (COVID-19) 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, 2020.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our 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 on-going basis, we evaluate our estimates, including those related to uncollectible 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, 2020 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Observations on effects of novel coronavirus

On March 11, 2020, the World Health Organization characterized the novel coronavirus outbreak as a pandemic. The outbreak has and continues to adversely affect the economies of the U.S., U.K., and other international markets and economies in which we operate. As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic, national, state, and local governments have and continue to take actions such as declaring a state of emergency, implementing social distancing and other guidelines, and shutting down and/or limiting the opening or operation of certain businesses which are not considered essential.

In these times of pandemic, our top priorities are to protect the health, well-being, and safety of our employees and partners, while still focusing on the key drivers of our business. To that end, and to insure we continue to operate safety and cautiously while also meeting our public health responsibilities, the Company has adopted flexible business practices including allowing most employees to work remotely in all locations. Our revenue decreased significantly for the three and six months ended March 31, 2021 due to the pandemic. This is largely the result of customers reducing their budgets. The pandemic has also had an adverse effect on our ability to transact one-on-one business.

25


We recognize the pandemic has created a dynamic and uncertain situation in the national economy, and we continue to closely monitor the latest information to make timely, informed business decisions and public disclosures regarding the potential impact of pandemic on our operations. Despite reduced infection rates and ever-increasing vaccination rates in the United States, many nations and certain pockets within the United States are still battling various strains/variants of the novel coronavirus, creating ongoing uncertainties as to when economies will return to business as usual and what that will look like, what regulatory measures or voluntary actions will be further implemented to limit the spread of COVID-19 and the duration of such measures, the extent, severity and impact of any further spread of COVID-19 variants or resurgence of COVID-19 in a given geographic region after it has hit its “peak,” and the extent to which herd immunity will be achieved through the vaccination process.  In summary, the scope of this pandemic and its effects are unprecedented, and we cannot at this time make a reasonable estimate on the extent or duration of the impacts on our business.

Results of Operations

Overview of the three months ended March 31, 2021

Our revenues decreased by approximately $2.8 million, or 17%, to $14.1 million for the three months ended March 31, 2021 as compared to $16.9 million for the three months ended March 31, 2020. The decrease in revenue is the result of a decrease of $2.2 million in our TS segment combined with a $0.6 million decrease in our HPP segment. Our gross margin percentage increased to 31% of revenues for the three months ended March 31, 2021 from 27% for the three months ended March 31, 2020. The increase is attributed to the TS segment. For the three months ended March 31, 2021 there was an operating loss of $0.1 million compared to an operating loss of $0.1 million for the three months ended March 31, 2020, primarily as a result of decreased sales offset with a higher gross margin as a percentage of revenue. Other income, (expense) net decreased approximately $0.6 million for the three months ended March 31, 2021 to approximately none as compared to income of $0.6 million for the three months ended March 31, 2020. This is primarily due to an increase in foreign exchange loss of $0.6 million for the three months ended March 31, 2021 from the prior year. An income tax expense of $723 thousand was recorded for the three months ended March 31, 2021 compared to an income tax expense of $1.2 million in the same period of 2020. The income tax expense for the three months ended March 31, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses incurred through the Paycheck Protection Program. The deferred tax asset change is a non-cash item.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended March 31, 2021 and 2020:

%

%

    

March 31, 2021

    

of sales

    

March 31, 2020

    

of sales

 

(Dollar amounts in thousands)

 

Sales

$

14,088

 

100

%  

$

16,883

 

100

%

Costs and expenses:

 

  

 

  

 

  

 

  

Cost of sales

 

9,720

 

69

%  

 

12,400

 

74

%

Engineering and development

 

762

 

5

%  

 

716

 

4

%

Selling, general and administrative

 

3,727

 

26

%  

 

3,910

 

23

%

Total costs and expenses

 

14,209

 

101

%  

 

17,026

 

101

%

Operating loss

 

(121)

 

(1)

%  

 

(143)

 

(1)

%

Other income, (expense) net

 

(3)

 

%  

 

580

 

3

%

Income (loss) before income taxes

 

(124)

 

(1)

%  

 

437

 

2

%

Income tax expense

 

723

 

5

%  

 

1,169

 

7

%

Net loss

$

(847)

 

(6)

%  

$

(732)

 

(5)

%

26


Revenues

Our revenues decreased by approximately $2.8 million to $14.1 million for the three months ended March 31, 2021 as compared to $16.9 million of revenues for the prior year period. TS segment revenues decreased by $2.2 million and HPP segment revenues decreased by approximately $0.6 million.

TS segment revenue change was as follows for the three months ended March 31, 2021 and March 31, 2020:

Decrease

 

    

2021

    

2020

    

$

    

%

 

(Dollar amounts in thousands)

Products

$

10,259

$

12,224

$

(1,965)

(16)

%

Services

 

2,941

 

3,184

 

(243)

(8)

%

Total

$

13,200

$

15,408

$

(2,208)

(14)

%

The decrease in TS segment product revenues of $2.0 million during the period is attributable to the U.S. division and is primarily the result of decreased sales to several major customers during the period due to companies continuing budget freezes or reductions. Service revenue for the three months ended March 31, 2021 decreased $0.2 million from the prior year. The changes in service revenue include decreased internal and third party service revenue of $0.7 million, partially offset with increased third party maintenance revenues of $0.4 million primarily related to sales of security and cloud based software as well as maintenance (all recorded as net revenue), and increased managed services revenue of $0.1 million.

HPP segment revenue change was as follows for the three months ended March 31, 2021 and 2020:

Decrease

 

    

2021

    

2020

    

$

    

%

 

(Dollar amounts in thousands)

Products

$

716

$

922

$

(206)

(22)

%

Services

 

172

 

553

 

(381)

(69)

%

Total

$

888

$

1,475

$

(587)

(40)

%

The HPP product revenues decreased by $0.2 million for the three months ended March 31, 2021 as compared to prior year, primarily as a result of a $0.2 million decrease in Myricom product sales. The HPP services revenues decreased $0.4 million for the three months ended March 31, 2021 from prior year primarily due to decreased royalties on high-speed processing boards related to the E2D program.

Our revenues by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the three months ended March 31, 2021 and March 31, 2020:

Increase (decrease)

 

    

2021

    

%

    

2020

    

%

    

$

    

%

 

(Dollar amounts in thousands)

Americas

$

13,033

 

92

%  

$

16,143

 

95

%  

$

(3,110)

(19)

%

Europe

 

779

 

6

%  

 

619

 

4

%  

 

160

26

%

Asia

 

276

 

2

%  

 

121

 

1

%  

 

155

128

%

Totals

$

14,088

 

100

%  

$

16,883

 

100

%  

$

(2,795)

(17)

%

The $3.1 million decrease in revenue to the Americas is primarily the result of decreased sales by our TS segment division of $2.3 million combined with a decrease in the HPP segment of $0.8 million. The $0.2 million increase in revenue to Europe is primarily the result of increased sales by our U.S. division of $0.1 million combined with a $0.1 million increase from the HPP segment. The revenue to Asia increased $0.2 million is primarily the result of an increase from the HPP segment.

27


Gross Margins

Our gross margin ("GM") decreased by approximately $0.1 million to $4.4 million for the three months ended March 31, 2021 as compared to a gross margin of approximately $4.5 million for the prior year. The GM as a percentage of revenue increased to 31% for the three months ended March 31, 2021, from 27%. The increase in GM as a percentage of revenue is attributed to the TS segment.

2021

2020

Increase (decrease)

 

    

GM$

    

GM%

    

GM$

    

GM%

    

GM$

    

GM%

 

(Dollar amounts in thousands)

TS

$

3,885

 

29

%  

$

3,656

 

24

%  

$

229

 

5

%

HPP

 

483

 

54

%  

 

827

 

56

%  

 

(344)

 

(2)

%

Total

$

4,368

 

31

%  

$

4,483

 

27

%  

$

(115)

 

4

%

The impact of product mix within our TS segment on gross margin for the three months ended March 31, 2021 and 2020 was as follows:

2021

2020

Increase (decrease)

 

    

GM$

    

GM%

    

GM$

    

GM%

    

GM$

    

GM%

 

(Dollar amounts in thousands)

Products

$

2,095

 

20

%  

$

1,814

 

15

%  

$

281

 

5

%

Services

 

1,790

 

61

%  

 

1,842

 

58

%  

 

(52)

 

3

%

Total

$

3,885

 

29

%  

$

3,656

 

24

%  

$

229

 

5

%

The overall TS segment GM as a percentage of sales increased to 29% for the three month period ended March 31, 2021 compared to 24% for the prior year. GM as a percentage of product sales increased to 20% for the three months ended March 31, 2021 from 15% for the prior year. This is primarily due to significant pricing discounts given to the U.S. division from several manufacturers that were not given in the prior year. GM as a percentage of service sales increased to 61% for the three months ended March 31, 2021 from 58% for the prior year period. This is primarily due to increased sales of third party maintenance revenues of $0.3 million primarily related to sales of security and cloud based software as well as maintenance (all recorded as net revenue) and increased sales of managed services compared to the prior year.

The impact of product mix within our HPP segment on gross margin for the three months ended March 31, 2021 and 2020 was as follows:

2021

2020

Increase (Decrease)

 

    

GM$

    

GM%

    

GM$

    

GM%

    

GM$

    

GM%

 

(Dollar amounts in thousands)

Products

$

326

 

46

%  

$

299

 

32

%  

$

27

 

14

%

Services

 

157

 

91

%  

 

528

 

95

%  

 

(371)

 

(4)

%

Total

$

483

 

54

%  

$

827

 

56

%  

$

(344)

 

(2)

%

The overall HPP segment GM as a percentage of sales decreased to 54% for the three months ended March 31, 2021 from 56% for the three months ended March 31, 2020. This 2% decrease is attributed to decreased GM from decreased services revenue including a $0.3 million decrease of royalty revenues, which is nearly all margin. Product GM as a percentage of revenue increased by 14% for the six months ended March 31, 2021 from prior year due to product mix and a reduction in manufacturing overhead expenses.

Operating Expenses

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment increased by approximately $0.1 million for the three months ended March 31, 2021 to $0.8 million from $0.7 million for the prior year. The current period

28


expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA SDS 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, 2021 and 2020:

For the three months ended March 31, 

 

% of

% of

$ Decrease

% Decrease

 

    

2021

    

Total

    

2020

    

Total

    

    

 

(Dollar amounts in thousands)

By Operating Segment:

 

  

 

  

 

  

 

  

 

  

 

  

TS segment

$

2,667

 

72

%  

$

2,775

 

71

%  

$

(108)

 

(4)

%

HPP segment

 

1,060

 

28

%  

 

1,135

 

29

%  

 

(75)

 

(7)

%

Total

$

3,727

 

100

%  

$

3,910

 

100

%  

$

(183)

 

(5)

%

SG&A expenses overall decreased $0.2 million for the three months ended March 31, 2021 as compared to the prior year. The $0.1 million decrease in TS segment SG&A expenses compared to the same prior year period is primarily the result of a $0.1 million decrease of payroll. The HPP segment SG&A expenses decreased $0.1 million for the three months ended March 31, 2021 as compared to the prior year due to decreased travel and stock compensation expense.

Other Income/Expenses

The following table details other income (expense) for the three months ended March 31, 2021 and 2020:

For the three months ended

Increase

    

March 31, 2021

    

March 31, 2020

    

(Decrease)

(Amounts in thousands)

Interest expense

$

(75)

$

(55)

$

(20)

Interest income

 

133

 

163

 

(30)

Foreign exchange (loss) gain

 

(154)

 

479

 

(633)

Other income (expense), net

 

93

 

(7)

 

100

Total other income (expense), net

$

(3)

$

580

$

(583)

The $583 thousand decrease in total other income (expense), net for the three months ended March 31, 2021 as compared to the prior year is primarily driven by an increase in foreign exchange loss of $633 thousand. The U.K. division has significant bank accounts with U.S. dollars and Euros. 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 gain or loss on the income statement and the foreign exchange loss is primarily from a Euro and U.S. Dollar bank account. The US dollar and Euro weakened relative to the British Pound for the three months ended March 31, 2021, which caused the foreign exchange loss.

The interest income decrease of $30 thousand for the three months ended March 31, 2021 as compared to the prior year is primarily related to agreements that have payment terms in excess of one year (see Note 6 in Item 1 to this Quarterly Report on Form 10-Q) from the TS-US segment.

Income Taxes

The income tax expense for the three months ended March 31, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses incurred through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the three months ended March 31, 2020 reflected the recording

29


of a valuation allowance against deferred tax assets during the quarter, offset by the anticipated tax benefit from the carryback of net operating losses.

We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes for the quarter ended March 31, 2021 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rates.

Overview of the six months ended March 31, 2021

Our revenues decreased by approximately $8.3 million, or 24%, to $25.5 million for the six months ended March 31, 2021 as compared to $33.7 million for the prior year. The decrease in overall revenue for the six months ended March 31, 2021 as compared to the prior year is primarily the result of an approximately $8.2 million decrease in our TS segment revenue. The is primarily due to decreased sales to several major customers in the U.S. division. Our overall gross margin percentage increased to 30% of revenue for the six months ended March 31, 2021 from 25% of revenue for the six months ended March 31, 2020. Our operating loss increased by approximately $0.2 million resulting in an operating loss of $0.7 million for the six months ended March 31, 2021 as compared to operating loss of $0.5 million for prior year period, primarily as a result of decreased product revenues, which was partially offset by overall increased gross margin as a percentage of revenue. Other income, (expense) net increased by $1.4 million primarily due the gain on forgiveness of the Payroll Protection Program loans, partially offset by an increase in foreign exchange loss of $0.8 million. An income tax expense of $833 thousand was recorded for the six months ended March 31, 2021 compared to an income tax expense of $1.1 million in the same period of 2020. The income tax expense for the six months ended March 31, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses incurred through the Paycheck Protection Program. The deferred tax asset change is a non-cash item.

The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2021 and 2020:

%

%

 

    

March 31, 2021

    

of sales

    

March 31, 2020

    

of sales

 

(Dollar amounts in thousands)

 

Sales

$

25,476

 

100

%  

$

33,741

 

100

%

Costs and expenses:

 

  

 

  

 

  

 

  

Cost of sales

 

17,730

 

70

%  

 

25,227

 

75

%

Engineering and development

 

1,491

 

6

%  

 

1,388

 

4

%

Selling, general and administrative

 

6,913

 

27

%  

 

7,671

 

23

%

Total costs and expenses

 

26,134

 

103

%  

 

34,286

 

102

%

Operating loss

 

(658)

 

(3)

%  

 

(545)

 

(2)

%

Other income, (expense) net

 

1,795

 

7

%  

 

372

 

1

%

Income (loss) before income taxes

 

1,137

 

4

%  

 

(173)

 

(1)

%

Income tax expense

 

833

 

3

%  

 

1,099

 

3

%

Net income (loss)

$

304

 

1

%  

$

(1,272)

 

2

%

Revenues

Our total revenues decreased by approximately $8.3 million to $25.5 million for the six months ended March 31, 2021 as compared to $33.7 million of revenues for the prior year.

30


TS segment revenue change was as follows for the six months ended March 31, 2021 and 2020:

Decrease

 

    

2021

    

2020

    

$

    

%

 

(Dollar amounts in thousands)

Products

$

17,491

$

25,016

$

(7,525)

(30)

%

Services

 

5,541

 

6,209

 

(668)

(11)

%

Total

$

23,032

$

31,225

$

(8,193)

(26)

%

The decrease in TS segment product revenues of $7.5 million for the six months ended March 31, 2021 as compared to the prior year period is the result of a decrease of $8.4 million in our U.S. division, partially offset with a $0.9 million increase in our U.K. division. The $8.4 million decrease in the U.S. division product revenues is the result of decreased sales to several major customers. The $0.9 million increase in the U.K. division product revenue is due to sales to one customer that did not occur in the prior year. The decrease in TS segment service revenues of $0.7 million for the six months ended March 31, 2021 as compared to the prior year period is attributable to the U.S. division and is primarily the result of a decrease of a $1.3 million decrease in internal and third party service revenues, partially offset by an increase of $0.5 million in third party maintenance revenue primarily related to sales of security and cloud based software as well as maintenance (all recorded as net revenue) and a $0.1 million increase in managed service contract revenues.

HPP segment revenue change was as follows for the six months ended March 31, 2021 and 2020:

    

Increase (decrease)

 

2021

    

2020

    

$

    

%

(Dollar amounts in thousands)

Products

$

1,892

$

1,689

$

203

12

%

Services

 

552

 

827

 

(275)

(33)

%

Total

$

2,444

$

2,516

$

(72)

(3)

%

The HPP product revenue increase of $0.2 million for the six months ended March 31, 2021 as compared to the prior year is primarily due to increased Multicomputer sales of approximately $0.4 million, partially offset with a decrease of $0.2 million from Myricom product sales. The decrease in HPP services revenues of approximately $0.3 million is primarily the result of a decrease in repair revenue.

Our revenues by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the six months ended March 31, 2021 and 2020:

Increase (decrease)

    

2021

    

%

    

2020

    

%

    

$

    

%

 

(Dollar amounts in thousands)

Americas

$

22,783

 

90

%  

$

32,268

 

95

%  

$

(9,485)

(29)

%

Europe

 

2,320

 

9

%  

 

1,282

 

4

%  

 

1,038

81

%

Asia

 

373

 

1

%  

 

191

 

1

%  

 

182

95

%

Totals

$

25,476

 

100

%  

$

33,741

 

100

%  

$

(8,265)

(24)

%

The $9.5 million decrease in the Americas revenues for the six months ended March 31, 2021 as compared to the same prior year period is primarily due to decreased revenue by our TS U.S. division of $9.2 million and decreased revenue by our HPP segment of $0.3 million. The $1.0 million increase in Europe revenue for the six month period ended March 31, 2021 as compared to the prior year is primarily due to increased sales by our TS U.K. division of $0.8 million, increased sales by our TS U.S. division of $0.1 million, and increased sales in our HPP segment of $0.1 million. The $0.2 million increase in Asia revenue for the six month period March 31, 2021 as compared to the prior year is primarily due to increased sales by our HPP segment.

31


Gross Margins

Our gross margin ("GM") decreased by $0.8 million to $7.7 million for the six months ended March 31, 2021 as compared to a gross margin of approximately $8.5 million for the prior year. However, the GM as a percentage of revenue increased to 30% for the six months ended March 31, 2021 from 25% for the prior year.

2021

2020

Increase (Decrease)

 

(Dollar amounts in thousands)

    

GM$

    

GM%

    

GM$

    

GM%

    

GM$

    

GM%

 

TS

$

6,321

 

27

%  

$

7,180

 

23

%  

$

(859)

 

4

%

HPP

 

1,425

 

58

%  

 

1,334

 

53

%  

 

91

 

5

%

Total

$

7,746

 

30

%  

$

8,514

 

25

%  

$

(768)

 

5

%

The impact of product mix within our TS segment on gross margin for the six months ended March 31, 2021 and 2020 is as follows:

2021

2020

Increase (decrease)

 

    

GM$

    

GM%

    

GM$

    

GM%

    

GM$

    

GM%

 

(Dollar amounts in thousands)

Products

$

2,980

 

17

%  

$

3,492

 

14

%  

$

(512)

 

3

%

Services

 

3,341

 

60

%  

 

3,688

 

59

%  

 

(347)

 

1

%

Total

$

6,321

 

27

%  

$

7,180

 

23

%  

$

(859)

 

4

%

The overall TS segment GM as a percentage of sales increased to 27% for the six months ended March 31, 2021 from 23% for the same prior year period. The 3% increase in GM on product as a percentage of product sales is primarily due to significant pricing discounts given to the U.S. division from several manufacturers that were not given in the prior year. The 1% increase in GM on services as a percentage of services sales is due to increased volume of managed services and increased third party maintenance revenues primarily related to sales of security and cloud based software as well as maintenance (all recorded as net revenue).

The impact of product mix within our HPP segment on gross margin for the six months ended March 31, 2021 and 2020 is as follows:

2021

2020

Increase (Decrease)

 

(Dollar amounts in thousands)

    

GM$

    

GM%

    

GM$

    

GM%

    

GM$

    

GM%

 

Products

$

901

 

48

%  

$

576

 

34

%  

$

325

 

14

%

Services

 

524

 

95

%  

 

758

 

92

%  

 

(234)

 

3

%

Total

$

1,425

 

58

%  

$

1,334

 

53

%  

$

91

 

5

%

The overall HPP segment GM as a percentage of sales increased to 58% for the period from 53% in the prior year period. The 5% increase in total GM as a percentage of sales in the HPP segment is primarily attributed to product mix in both product and service revenue combined with a reduction in manufacturing overhead expenses.

Operating Expenses

Engineering and Development Expenses

Engineering and development expenses increased by $0.1 million to $1.5 million for the six months ended March 31, 2021 as compared to the prior year. The current period expenses were primarily for product engineering expenses incurred in connection with continued development of the ARIA SDS cyber security products.

32


Selling, General and Administrative Expenses

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the six months ended March 31, 2021 and 2020:

For the six months ended March 31, 

% of

% of

$ Decrease

% Decrease

 

    

2021

    

Total

    

2020

    

Total

    

 

(Dollar amounts in thousands)

By Operating Segment:

 

  

 

  

 

  

 

  

 

  

 

  

TS segment

$

4,786

 

69

%  

$

5,438

 

71

%  

$

(652)

 

(12)

%

HPP segment

 

2,127

 

31

%  

 

2,233

 

29

%  

 

(106)

 

(5)

%

Total

$

6,913

 

100

%  

$

7,671

 

100

%  

$

(758)

 

(10)

%

SG&A expenses decreased by approximately $0.8 million, or 10%, for the six months ended March 31, 2021 as compared to the prior year. The $0.7 million decrease in TS segment expenses is primarily attributed to decreased payroll, variable compensation expenses, and travel. The HPP segment $0.1 million decrease, or 5%, for the six months ended March 31, 2021 as compared to the prior year is primarily due to decreased stock compensation and travel expenses.

Other Income/Expenses

The following table details other income (expense) for the six months ended March 31, 2021 and 2020:

For the six months ended

$ Increase

    

March 31, 2021

    

March 31, 2020

    

(Decrease)

(Amounts in thousands)

Interest expense

$

(113)

$

(112)

$

(1)

Interest income

 

231

 

336

 

(105)

Foreign exchange (loss) gain

 

(621)

 

144

 

(765)

Gain on debt forgiveness

2,196

2,196

Other income, net

 

102

 

4

 

98

Total other income (expense), net

$

1,795

$

372

$

1,423

The $1.4 million increase to total other income (expense), net for the six months ended March 31, 2021 as compared to the prior year is primarily driven by a gain on debt forgiveness of $2.2 million, partially offset by an increase in foreign exchange loss of $0.8 million. The U.K. division has significant bank accounts with U.S. dollars and Euros. 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 gain or loss on the income statement and the foreign exchange loss is primarily from a Euro and U.S. Dollar bank account. The US dollar and Euro weakened relative to the British Pound for the six months ended March 31, 2021, which caused the foreign exchange loss.

The decrease in interest income of $105 thousand is primarily related to agreements that have payment terms in excess of one year (see Note 6) from the TS-US segment.

Income Taxes

The income tax expense of $833 thousand for the six months ended March 31, 2021 is primarily driven by an increase in the valuation allowance against deferred tax assets in the period, offset by a benefit recorded for a change in tax law, allowing for the immediate deduction of covered expenses incurred through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the three months ended March 31, 2020 reflected the recording of a valuation allowance against deferred tax assets during the quarter, offset by the anticipated tax benefit from the carryback of net operating losses.

33


We have in general historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full calendar year to ordinary income or loss for the reporting period. However, we used a discrete effective tax rate method to calculate income taxes for the quarter ended March 31, 2021 because we determined that our ordinary income or loss cannot be reliably estimated and small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rates.

Liquidity and Capital Resources

Our primary source of liquidity is our cash and cash equivalents, which increased by $1.1 million to $20.4 million as of March 31, 2021 from $19.3 million as of September 30, 2020.

Our significant sources of cash for six months ended March 31, 2021 included an increase in accounts payable and accrued expenses of $1.7 million, a decrease in inventories of $1.0 million, and an increase in deferred revenue of $0.5 million.

Our significant uses of cash for the six months ended March 31, 2021 are primarily related to the HPP division engineering and development costs of $1.5 million causing the operating loss.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $9.9 million as of March 31, 2021 consisted of 0.8 million Euros, 0.3 million British Pounds, and 8.4 million U.S. Dollars. This cash is included in our total cash and cash equivalents reported within the financial statements.

As of March 31, 2021 and September 30, 2020, 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 $13.8 million and $13.4 million were available as of March 31, 2021 and September 30, 2020, respectively. As of March 31, 2021 and September 30, 2020 there were no cash withdrawals outstanding.

During the second quarter of fiscal year 2021 we entered into two multi-year agreements that involved us selling goods and services in which we were an agent and therefore recorded net revenue for the transactions. These agreements combined involved us receiving approximately $9.0 million over four years and us making payments of around $8.7 million over four years with similar dates to when we would be receiving payments.

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.

On April 17, 2020, the Company and Modcomp, Inc., its wholly owned subsidiary each received a loan (“SBA Loans”) in the form of a promissory note from Paragon Bank in the amounts of $827,000 and $1,353,600, respectively under the Paycheck Protection Program, which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The SBA loans had a two-year term and carried an annual fixed interest rate of 1%. The SBA Loans were forgiven in full by the SBA in the first quarter of fiscal year 2021.

Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash received from the SBA loans, 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.

34


Item 4.         Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Our Chief Executive Officer, our Chief Financial Officer and other members of our senior management team supervised and participated in this evaluation. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2021, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective, due to the fact that we are not yet able to conclude that the material weakness described in this Item 4 has been remediated by the changes we made in response to that material weakness.

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the period ended September 30, 2020, our management identified a material weakness as of such date.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be able to be prevented or detected in a timely basis.  The identified material weakness is in connection with internal controls over the revenue recognition process, specifically the failure to properly identify whether the Company was to be considered the principal or the agent in certain transactions. We determined that controls over the revenue recognition process were not operating effectively and the resulting control gap amounted to a material weakness in our controls over financial reporting.

During the period following our initial identification of the material weakness referred to above, management assessed various alternatives to remediate this material weakness and we implemented changes to our system of internal controls, which included the implementation of enhanced internal auditing procedures, whereby revenue transactions are subjected to an additional review process at the corporate level to ensure the correct accounting methodology is applied to all revenue transactions. Although we have implemented such changes to our internal controls over financial reporting as described above, at this time, we cannot conclude that the material weakness has been remediated and we will continue to make changes and upgrade systems and processes throughout fiscal year 2021.

Changes in Internal Control over Financial Reporting

During the six months ended March 31, 2021, there was a significant change in controls related to the material weakness discussed above. Controls around classifying whether the Company is considered the principal or the agent in transactions have been redesigned and implemented, which are intended to remediate the material weakness.

Prior to these changes, the Company’s primary procedure to find transactions that should be recorded “net” was reliance on a search of key words in the item description and stock-keeping unit. The primary control failure related to the key words identifying certain items where the Company was the principal, but the item was incorrectly recorded on a net basis. As a result, the primary identifier is not on the reliance of key words. Instead, the new enhanced procedures include review of every line item with additional levels of review from both sales and financial management

35


PART II.  OTHER INFORMATION

Item 1A. Risk factors

There have been no material changes to the risk factors set forth in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

Item 6.         Exhibits

Number

   

Description

31.1*

Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Executive Officer

31.2*

Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Financial Officer

32.1*

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

101*

Interactive Data Files regarding (a) our Consolidated Balance Sheets as of March 31, 2021 and September 30, 2020, (b) our Consolidated Statements of Income for the three and six months ended March 31, 2021 and 2020, (c) our Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended March 31, 2021 and 2020, (d) our Consolidated Statement of Shareholders’ Equity for the three and six months ended March 31, 2021 and 2020, (e) our Consolidated Statements of Cash Flows for the three and six months ended March 31, 2021 and 2020 and (f) the Notes to such Consolidated Financial Statements.


*   Filed Herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CSP INC.

May 13, 2021

By:

/s/ Victor Dellovo

Victor Dellovo

Chief Executive Officer,

President and Director

May 13, 2021

By:

/s/ Gary W. Levine

Gary W. Levine

Chief Financial Officer

36