CSP 10Q 2021 Q3 Quarterly report

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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 June 30, 2021

◻ 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 August 9, 2021, the registrant had 4,377,466 shares of common stock issued and outstanding.

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INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (unaudited) as of June 30, 2021 and September 30, 2020	3

	Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2021 and 2020	4

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended June 30, 2021 and 2020	5

	Consolidated Statement of Shareholders’ Equity (unaudited) for the three and nine months ended June 30, 2021 and 2020	6

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)


	June 30,		September 30,
	2021		2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	19,653	$	19,264
Accounts receivable, net of allowances of $151 and $181		16,301		13,362
Investment in lease, net-current portion		67		336
Inventories		5,177		5,285
Refundable income taxes		1,145		807
Other current assets		3,420		2,535
Total current assets		45,763		41,589


Property, equipment and improvements, net		842		1,047
Operating lease right-of-use assets		1,523		2,014
Intangibles, net		21		28
Investment in lease, net-less current portion		31		81
Long-term receivable		8,117		3,642
Deferred income taxes		—		1,149
Cash surrender value of life insurance		4,161		3,948
Other assets		98		147
Total assets	$	60,556	$	53,645

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	12,255	$	8,523
Line of credit		1,654		1,573
Notes payable - current portion		748		1,613
Deferred revenue		1,446		947
Pension and retirement plans		311		321
Total current liabilities		16,414		12,977
Pension and retirement plans		6,423		6,471
Notes payable - noncurrent portion		954		2,485
Operating lease liabilities - noncurrent portion		939		1,390
Income taxes payable		524		586
Other noncurrent liabilities		4,649		202
Total liabilities		29,903		24,111

Shareholders’ equity:
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,377 and 4,276 shares, respectively		44		43
Additional paid-in capital		17,848		16,994
Retained earnings		24,373		24,492
Accumulated other comprehensive loss		(11,612)		(11,995)
Total shareholders’ equity		30,653		29,534
Total liabilities and shareholders’ equity	$	60,556	$	53,645

See accompanying notes to unaudited consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except for per share data)


	For the three months ended				For the nine months ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Sales:
Product	$	10,142	$	10,399	$	29,526	$	37,104
Services		3,579		3,381		9,671		10,417
Total sales		13,721		13,780		39,197		47,521

Cost of sales:
Product		8,176		8,600		23,678		31,237
Services		1,316		956		3,544		3,546
Total cost of sales		9,492		9,556		27,222		34,783

Gross profit		4,229		4,224		11,975		12,738

Operating expenses:
Engineering and development		700		693		2,191		2,081
Selling, general and administrative		3,886		3,924		10,799		11,595
Total operating expenses		4,586		4,617		12,990		13,676
Operating loss		(357)		(393)		(1,015)		(938)

Other income (expense):
Foreign exchange (loss) gain		(110)		113		(731)		257
Interest expense		(131)		(56)		(244)		(168)
Interest income		175		133		406		469
Gain on forgiveness of debt		—		—		2,196		—
Other income (expense), net		35		3		137		7
Total other income (expense), net		(31)		193		1,764		565
(Loss) income before income taxes		(388)		(200)		749		(373)
Income tax expense		35		10		868		1,109
Net loss	$	(423)	$	(210)	$	(119)	$	(1,482)
Net loss attributable to common shareholders	$	(423)	$	(210)	$	(119)	$	(1,482)

Net loss per share – basic	$	(0.10)	$	(0.05)	$	(0.03)	$	(0.37)
Weighted average shares outstanding – basic		4,179		4,048		4,137		4,015
Net loss per share – diluted	$	(0.10)	$	(0.05)	$	(0.03)	$	(0.37)
Weighted average shares outstanding – diluted		4,179		4,048		4,137		4,015

See accompanying notes to unaudited consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)


	For the three months ended				For the nine months ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Net loss	$	(423)	$	(210)	$	(119)	$	(1,482)
Foreign currency translation gain (loss) adjustments		32		(22)		383		2
Total comprehensive (loss) income	$	(391)	$	(232)	$	264	$	(1,480)

See accompanying notes to unaudited consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended June 30, 2021 and 2020:

(Amounts in thousands, except per share data)



									Accumulated
					Additional				other		Total
					Paid-in		Retained		comprehensive		Shareholders’
For the Three Months Ended June 30, 2020:	Shares		Amount		Capital		Earnings		loss		Equity
Balance as of March 31, 2020	4,254		$	43	$	16,300	$	24,668	$	(12,569)	$	28,442
Net loss	—			—		—		(210)		—		(210)
Other comprehensive loss	—			—		—		—		(22)		(22)
Purchase of common stock	(1)			—		—		(3)		—		(3)
Stock-based compensation	—			—		262		—		—		262
Balance as of June 30, 2020	4,253		$	43	$	16,562	$	24,455	$	(12,591)	$	28,469

		��							Accumulated
					Additional				other		Total
					Paid-in		Retained		comprehensive		Shareholders’
For the Three Months Ended June 30, 2021:	Shares		Amount		Capital		Earnings		loss		Equity
Balance as of March 31, 2021	4,394		$	44	$	17,605	$	24,796	$	(11,644)	$	30,801
Net loss	—			—		—		(423)		—		(423)
Other comprehensive income	—			—		—		—		32		32
Stock-based compensation	—			—		243		—		—		243
Restricted stock cancellation	(17)			—		—		—		—		—
Balance as of June 30, 2021	4,377		$	44	$	17,848	$	24,373	$	(11,612)	$	30,653

See accompanying notes to unaudited consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the nine months ended June 30, 2021 and 2020:

(Amounts in thousands, except per share data)


								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
For the nine months ended June 30, 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	—		—		—		(1,482)		—		(1,482)
Other comprehensive income	—		—		—		—		2		2
Exercise of stock options	—		—		2		—		—		2
Stock-based compensation	—		—		717		—		—		717
Restricted stock issuance	97		1		—		—		—		1
Issuance of shares under employee stock purchase plan	9		—		110		—		—		110
Purchase of common stock	(7)		—		—		(46)		—		(46)
Cash dividends paid on common stock ($0.30 per share)	—		—		—		(1,263)		—		(1,263)
Balance as of June 30, 2020	4,253	$	43	$	16,562	$	24,455	$	(12,591)	$	28,469

								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
For the nine months ended June 30, 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 loss	—		—		—		(119)		—		(119)
Other comprehensive income	—		—		—		—		383		383
Stock-based compensation	—		—		748		—		—		748
Restricted stock cancellation	(17)		—		—		—		—		—
Restricted stock issuance	103		1		—		—		—		1
Issuance of shares under employee stock purchase plan	15		—		106		—		—		106
Balance as of June 30, 2021	4,377	$	44	$	17,848	$	24,373	$	(11,612)	$	30,653

See accompanying notes to unaudited consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)


	For the nine months ended
	June 30,		June 30,
	2021		2020
Operating activities
Net loss	$	(119)	$	(1,482)

Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		286		345
Amortization of intangibles		7		7
Loss on sale of fixed assets, net		1		9
Foreign exchange loss		731		(257)
Non-cash changes in accounts receivable		51		53
Non-cash changes in inventories		29		342
Non-cash lease expense		483		486
Stock-based compensation expense on stock options and restricted stock awards		748		717
Deferred income taxes		1,149		1,946
Increase in cash surrender value of life insurance		(143)		(21)
Non-cash other		82		—

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		(2,974)		4,228
Decrease in inventories		82		1,064
Increase in refundable income taxes		(338)		(160)
Decrease (increase) in operating lease right-of-use assets		9		(2,666)
(Increase) decrease in other assets		(825)		1,360
Decrease in investment in lease		318		265
(Increase) decrease in long-term receivable		(4,475)		182
Increase (decrease) in accounts payable and accrued expenses		3,843		(6,911)
(Decrease) increase in operating lease liabilities		(352)		2,240
Increase in deferred revenue		499		525
(Decrease) Increase in pension and retirement plans liabilities		(402)		26
Decrease in income taxes payable		(62)		(694)
Increase (decrease) in other long-term liabilities		4,445		(379)
Net cash provided by operating activities		877		1,225

Investing activities
Life insurance premiums paid		(70)		(144)
Proceeds from sales of property, equipment, and improvements		1		—
Purchases of property, equipment and improvements		(84)		(285)
Net cash used in investing activities		(153)		(429)

Financing activities
Dividends paid		—		(1,263)
Net payments under line-of-credit agreement		82		(1,346)
Proceeds from debt		—		4,219
Repayments on debt		(248)		(623)
Principal payments on finance leases		(262)		(248)
Purchase of common stock		—		(46)
Proceeds from issuance of shares under equity compensation plans		106		112
Net cash (used in) provided by financing activities		(322)		805
Effects of exchange rate on cash		(13)		276
Net increase in cash and cash equivalents		389		1,877
Cash and cash equivalents beginning of period		19,264		18,099
Cash and cash equivalents end of period	$	19,653	$	19,976

Supplementary cash flow information:
Cash paid for income taxes	$	114	$	16
Cash paid for interest	$	189	$	189

Supplementary non-cash financing activities:
Gain on forgiveness of debt	$	2,196	$	—
Obtaining a right-of-use asset in exchange for a lease liability	$	—	$	216

See accompanying notes to unaudited consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 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 2 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 nine months ended June 30, 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, Cost of sales – Product, and Cost of sales - Services. 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 June 30, 2020						For the nine months ended June 30, 2020
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
Sales:
Product	$	10,294	$	105	$	10,399	$	35,812	$	1,292	$	37,104
Services		3,238		143		3,381		10,387		30		10,417
Total sales		13,532		248		13,780		46,199		1,322		47,521

Cost of sales:
Product		8,361		239		8,600		29,924		1,313		31,237
Services		947		9		956		3,537		9		3,546
Total cost of sales		9,308		248		9,556		33,461		1,322		34,783

Gross profit	$	4,224	$	—	$	4,224	$	12,738	$	—	$	12,738

Operating loss	$	(393)	$	—	$	(393)	$	(938)	$	—	$	(938)

Net loss	$	(210)	$	—	$	(210)	$	(1,482)	$	—	$	(1,482)

Net loss per share – basic	$	(0.05)	$	—	$	(0.05)	$	(0.37)	$	—	$	(0.37)
Net loss per share – diluted	$	(0.05)	$	—	$	(0.05)	$	(0.37)	$	—	$	(0.37)

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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 June 30, 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

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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 ratably over the warranty period. 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.

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 our 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.

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See disaggregated revenues below by products/services and geography.


			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
For the three months ended June 30,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2021
Sales:
Product	$	602	$	130	$	9,408	$	9,538	$	10,140
Service		356		83		3,140		3,223		3,579
Finance *		—		—		2		2		2
Total sales	$	958	$	213	$	12,550	$	12,763	$	13,721

			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
For the three months ended June 30,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2020
Sales:
Product	$	780	$	75	$	9,525	$	9,600	$	10,380
Service		803		132		2,446		2,578		3,381
Finance *		—		—		19		19		19
Total sales	$	1,583	$	207	$	11,990	$	12,197	$	13,780


			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
For the nine months ended June 30	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2021
Sales:
Product	$	2,494	$	1,774	$	25,238	$	27,012	$	29,506
Service		908		260		8,503		8,763		9,671
Finance *		—		—		20		20		20
Total sales	$	3,402	$	2,034	$	33,761	$	35,795	$	39,197

			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
For the nine months ended June 30	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2020
Sales:
Product	$	2,469	$	812	$	33,755	$	34,567	$	37,036
Service		1,630		342		8,445		8,787		10,417
Finance *		—		—		68		68		68
Total sales	$	4,099	$	1,154	$	42,268	$	43,422	$	47,521

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

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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 our performance toward satisfying a performance obligation are used to measure progress. An estimate of hours for each professional service agreement is made at the beginning of each contract based on prior experience and monitored throughout the performance of 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, we have 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 remain 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 we are acting as a principal party to the transaction or simply acting as an agent or broker based on control and timing. We are a principal if we control the good or service before that good or service is transferred to the customer. We record revenue as gross when we are 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 sales. 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 we are an agent, revenue is typically recorded at a point in time. When we are 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 we have performed work but do not have an unconditional right to payment, a contract asset is recorded. When we have the right to bill a customer, accounts receivable is recorded as an unconditional right exists. Current contract assets were $1.7 million and $1.0 million as of June 30, 2021 and September 30, 2020, respectively. The current portion is recorded in other current assets on the consolidated balance sheets. There were 0 noncurrent contract assets as of June 30, 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. There was a large increase during the nine months ended June 30, 2021 due to a noncancelable contract for managed services in the TS segment.

Contract liabilities arise when payment is received before we transfer a good or service to the customer. Current contract liabilities were $1.4 million and $0.9 million as of June 30, 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 $0.6 million and $0.2 million as of June 30, 2021 and September 30, 2020, respectively. These noncurrent liabilities are recorded in other noncurrent liabilities on the consolidated balance sheets. Revenue recognized for the nine months ended that was included in contract liabilities as of September 30, 2020 was $0.5 million.

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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 we expect 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 June 30, 2021 and September 30, 2020. The portion of current capitalized costs were $204 thousand and $130 thousand as of June 30, 2021 and September 30, 2020, respectively. There are 0 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 June 30, 2021 and 2020 were $89 thousand and $84 thousand, respectively. The amount of incremental costs amortized for the nine months ended June 30, 2021 and 2020 were $260 thousand and $162 thousand, respectively. This is recorded in selling, general, and administrative expenses. There was 0 impairment related to incremental costs capitalized during the three and nine months ended June 30, 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 June 30, 2021 and $13 thousand as of September 30, 2020. The portion of noncurrent capitalized costs were $13 thousand and $22 thousand as of June 30, 2021 and September 30, 2020, respectively. The amount of fulfillment costs amortized for three and nine months ended June 30, 2021 were $3 thousand and $9 thousand, respectively. These costs amortized were recorded in cost of sales. The amount of fulfillment costs amortized for three and nine months ended June 30, 2020 were $3 thousand and $9 thousand, respectively. These costs amortized were recorded in cost of sales. There was 0 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 our 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. We 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.

We have 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 June 30, 2021 is set forth in the table below:


	(Amounts in thousands)
Fiscal 2021 (remaining 3 months)	$	463
Fiscal 2022		1,429
Fiscal 2023		668
Fiscal 2024		61
	$	2,621

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

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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 nine months ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020

	(Amounts in thousands except per share data)
Net loss	$	(423)	$	(210)		(119)		(1,482)
Less: net loss attributable to nonvested common stock		—		—		—		—
Net loss attributable to common shareholders	$	(423)	$	(210)	$	(119)	$	(1,482)

Weighted average total shares outstanding – basic		4,179		4,048		4,137		4,015
Less: weighted average non–vested shares outstanding		—		—		—		—
Weighted average number of common shares outstanding – basic		4,179		4,048		4,137		4,015
Potential common shares from non–vested stock awards and the assumed exercise of stock options		—		—		—		—
Weighted average common shares outstanding – diluted		4,179		4,048		4,137		4,015

Net loss per share – basic	$	(0.10)	$	(0.05)	$	(0.03)	$	(0.37)
Net loss per share – diluted	$	(0.10)	$	(0.05)	$	(0.03)	$	(0.37)

Non-vested restricted stock awards of 208,000 and 209,000 shares were excluded from the diluted loss per share calculation for the three and nine months ended June 30, 2021, respectively. Non-vested restricted stock awards of 205,000 and 200,000 shares were excluded from the diluted loss per share calculation for the three and nine months ended June 30, 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 $4.6 million and $8.1 million as of June 30, 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 2 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 the effective date of the agreement. 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.

There were 2 new agreements effective in the third quarter of fiscal year 2021 causing an increase in accounts and long-term receivable. These agreements included approximately $5.2 million of payments to be received over the next 2 years from the effective date of the agreement. It was determined we were acting as the agent in the transactions and recorded net revenue of approximately $0.4 million during the third quarter of fiscal year 2021.

The receivables with a payment term exceeding one year carry an 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.

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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 0 past amounts due as of June 30, 2021 or September 30, 2020. There was 0 activity in the allowance for credit losses of these receivables for the nine months ended June 30, 2021 and June 30, 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 June 30, 2021 and 2020 was $169 thousand and $120 thousand, respectively. The amount of interest income earned from sales whose payment terms exceed one year for the nine months ended June 30, 2021 and 2020 was $387 thousand and $349 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 (3 months)	$	1,280
2022		4,991
2023		4,115
2024		1,560
2025		1,560
Total payments		13,506
Less: unearned income		841
Total, net of unearned income	$	12,665

7. Inventories

Inventories consist of the following:


	June 30,		September 30,
	2021		2020

	(Amounts in thousands)
Raw materials	$	761	$	574
Work-in-process		395		213
Finished goods		4,021		4,498
Total	$	5,177	$	5,285

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8. Leases

Information related to both lessee and lessor

The components of lease costs for the three months ended June 30, 2021 and 2020 are as follows:


		Three months ended
Consolidated Statements of Operations Location	Consolidated Statements of Operations Location	June 30, 2021		June 30, 2020
		(Amounts in thousands)
Finance Lease:
Interest on lease liabilities	Interest expense	$	2	$	5
Operating Lease:
Operating lease cost	Selling, general, and administrative		170		186
Short-term lease cost	Selling, general, and administrative		23		3
Total lease costs		$	195	$	194
Less sublease interest income	Revenue		(2)		(19)
Total lease costs, net of sublease interest income		$	193	$	175

The components of lease costs for nine months ended June 30, 2021 and 2020 are as follows:


		Nine months ended
Consolidated Statements of Operations Location	Consolidated Statements of Operations Location	June 30, 2021		June 30, 2020
		(Amounts in thousands)
Finance Lease:
Interest on lease liabilities	Interest expense	$	10	$	24
Operating Lease:
Operating lease cost	Selling, general, and administrative		538		547
Short-term lease cost	Selling, general, and administrative		36		9
Total lease costs		$	584	$	580
Less sublease interest income	Revenue		(20)		(68)
Total lease costs, net of sublease interest income		$	564	$	512

Supplemental cash flow information related to leases for three months ended June 30, 2021 and 2020 is below:


	Three months ended
	June 30, 2021		June 30, 2020
	(Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	177	$	182
Operating cash flows from short-term leases		23		10
Operating cash flows from finance leases		2		6
Financing cash flows from finance leases		89		91
Lease assets obtained in exchange for new lease liabilities
Operating leases		—		212
Cash received from subleases		113		113

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Supplemental cash flow information related to leases for nine months ended June 30, 2021 and 2020 is below:


	Nine months ended
	June 30, 2021		June 30, 2020
	(Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	553	$	561
Operating cash flows from short-term leases		36		29
Operating cash flows from finance leases		10		25
Financing cash flows from finance leases		262		248
Lease assets obtained in exchange for new lease liabilities
Operating leases		—		216
Cash received from subleases		338		338

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 another 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, “Accounts and Long-Term Receivable” 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.

Interest expense related to these agreements for the three months ended June 30, 2021 was $92 thousand. Interest expense related to the notes for the nine months ended June 30, 2021 was $121 thousand. There was not interest expense in prior year due to these agreements being effective in the second quarter of fiscal year 2021.

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:


	June 30, 2021
	(Amounts in thousands)
Current	$	1,468
Less: discount		246
Accounts payable and accrued expenses	$	1,222

Noncurrent	$	4,403
Less: discount		353
Other noncurrent liabilities	$	4,050

The Company had a total of approximately $6.8 million due to this vendor including the 2 aforementioned agreements and other payables as of June 30, 2021. This is approximately 40% 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

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that it must purchase certain products from the vendor. Management believes other suppliers could provide similar products on comparable terms.

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 presented on the Consolidated Statement of Operations as Gain on forgiveness of debt.

Interest expense related to the notes for the three months ended June 30, 2021 and 2020 was $21 thousand and $36 thousand, respectively. Interest expense related to the notes for the nine months ended June 30, 2021 and 2020 was $67 thousand and $99 thousand, respectively. Below are details of the notes payable.


	June 30, 2021		September 30, 2020
	(Amounts in thousands)
Current	$	808	$	1,702
Less: notes discount		60		89
Notes payable - current portion	$	748	$	1,613

Noncurrent	$	987	$	2,559
Less: notes discount		33		74
Notes payable - noncurrent portion	$	954	$	2,485

As of June 30, 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. NaN 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 June 30, 2021 and September 30, 2020, Company borrowings, all from the TS segment, under the inventory line of credit were $1.7 million and $1.6 million, respectively, and the Company was in compliance with all financial covenants. As of June 30,

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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 June 30, 2021 and September 30, 2020 there were 0 cash withdrawals outstanding.

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 June 30,
	2021						2020
	U.K.		U.S.		Total		U.K.		U.S.		Total

	(Amounts in thousands)
Pension:
Interest cost	$	63	$	3	$	66	$	64	$	3	$	67
Expected return on plan assets		(103)		—		(103)		(72)		—		(72)
Amortization of past service costs		2		—		2		2		—		2
Amortization of net gain		47		1		48		46		—		46
Net periodic benefit cost	$	9	$	4	$	13	$	40	$	3	$	43

Post Retirement:
Service cost	$	—	$	8	$	8	$	—	$	10	$	10
Interest cost		—		13		13		—		12		12
Amortization of net gain		—		(39)		(39)		—		4		4
Net periodic cost	$	—	$	(18)	$	(18)	$	—	$	26	$	26

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	Nine Months Ended June 30,
	2021						2020
	U.K.		U.S.		Total		U.K.		U.S.		Total

	(Amounts in thousands)
Pension:
Interest cost	$	182	$	8	$	190	$	196	$	11	$	207
Expected return on plan assets		(299)		—		(299)		(220)		—		(220)
Amortization of past service costs		6		—		6		6		—		6
Amortization of net gain (loss)		136		3		139		142		2		144
Net periodic benefit cost	$	25	$	11	$	36	$	124	$	13	$	137

Post Retirement:
Service cost	$	—	$	31	$	31	$	—	$	29	$	29
Interest cost		—		35		35		—		35		35
Amortization of net loss		—		(14)		(14)		—		16		16
Net periodic cost	$	—	$	52	$	52	$	—	$	80	$	80

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


	Fair Values as of
	June 30, 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	$	178	$	178	$	—	$	—	$	471	$	471	$	—	$	—
Pooled funds		11,891		11,891		—		—		9,269		9,269		—		—
Total plan assets	$	12,069	$	12,069	$	—	$	—	$	9,740	$	9,740	$	—	$	—

12. Income Taxes

An income tax expense of $35 thousand was recorded for the three months ended June 30, 2021 compared to an income tax expense of $10 thousand in the same period of 2020. An income tax expense of $868 thousand was recorded for the nine months ended June 30, 2021 compared to income tax expense of $1,109 thousand in the same period of 2020. The income tax expense for the nine months ended June 30, 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 income tax expense for the year to date ended June 30, 2020 reflected the recording of a valuation allowance against deferred tax assets during the third 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:


	June 30,		September 30,
	2021		2020

	(Amounts in thousands)
Cumulative effect of foreign currency translation	$	(4,313)	$	(4,696)
Cumulative unrealized loss on pension liability		(7,299)		(7,299)
Accumulated other comprehensive loss	$	(11,612)	$	(11,995)

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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

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

The Company had 0 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 June 30, 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 June 30, 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	$	19,653	$	19,653	$	19,264	$	19,264	1	Consolidated Balance Sheets
Accounts and long-term receivable*		12,665		12,665		5,839		5,839	3	Note 6
Liabilities:
Accounts payable and accrued expenses and other long-term liabilities*		5,272		5,272		—		—	3	Note 9
Line of Credit		1,654		1,654		1,573		1,573	2	Consolidated Balance Sheets & Note 10
Notes payable		1,702		1,702		4,098		4,098	3	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.

Line of credit

The fair value of our line of credit is based on borrowing rates currently available to a market participant for loans with similar terms or maturity. The carrying amount of our outstanding revolving line of credit approximates fair value because

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the base interest rate charged varies with market conditions and the credit spread is commensurate with current market spreads for issuers of similar risk. No interest accrues under the inventory line of credit when advances are paid within terms.

Notes Payable

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.

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 June 30, 2021 and September 30, 2020.

15. Segment Information

The following tables present certain operating segment information for the three and nine months ended June 30, 2021 and 2020.


			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
For the three months ended June 30,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2021
Sales:
Product	$	602	$	130	$	9,410	$	9,540	$	10,142
Service		356		83		3,140		3,223		3,579
Total sales	$	958	$	213	$	12,550	$	12,763	$	13,721
Income (loss) from operations	$	(1,372)	$	(95)	$	1,110	$	1,015	$	(357)
Total assets	$	8,501	$	9,942	$	42,113	$	52,055	$	60,556
Capital expenditures		11		—		30		30		41
Depreciation and amortization		41		—		50		50		91

2020
Sales:
Product	$	780	$	75	$	9,544	$	9,619	$	10,399
Service		803		132		2,446		2,578		3,381
Total sales	$	1,583	$	207	$	11,990	$	12,197	$	13,780
Income (loss) from operations	$	(765)	$	32	$	340	$	372	$	(393)
Total assets	$	9,046	$	10,729	$	34,486	$	45,215	$	54,261
Capital expenditures		—		—		45		45		45
Depreciation and amortization		50		—		63		63		113

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			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
For the nine months ended June 30,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2021
Sales:
Product	$	2,494	$	1,774	$	25,258	$	27,032	$	29,526
Service		908		260		8,503		8,763		9,671
Total sales	$	3,402	$	2,034	$	33,761	$	35,795	$	39,197
Income (loss) from operations	$	(3,565)	$	(130)	$	2,680	$	2,550	$	(1,015)
Total assets	$	8,501	$	9,942	$	42,113	$	52,055	$	60,556
Capital expenditures		18		—		66		66		84
Depreciation and amortization		134		—		159		159		293

2020
Sales:
Product	$	2,469	$	812	$	33,823	$	34,635	$	37,104
Service		1,630		342		8,445		8,787		10,417
Total sales	$	4,099	$	1,154	$	42,268	$	43,422	$	47,521
Income (loss) from operations	$	(3,052)	$	(15)	$	2,129	$	2,114	$	(938)
Total assets	$	9,046	$	10,729	$	34,486	$	45,215	$	54,261
Capital expenditures		63		—		222		222		285
Depreciation and amortization		165		3		184		187		352

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, “Accounts and Long-Term Receivable” 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 nine months ended June 30, 2021 and 2020.


	For the three months ended June 30,								For the nine months ended June 30,
	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	$	1.4	11	%	$	1.6	11	%	$	2.2	6	%	$	2.3	5	%
Customer B	$	0.5	4	%	$	1.9	14	%	$	2.3	6	%	$	4.2	9	%

Customer B totaled approximately $12.4 million, or 51%, and approximately $4.7 million, or 28%, of total consolidated accounts receivable and long-term receivable as of June 30, 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 June 30, 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 June 30, 2021.

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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 sales decreased significantly for the nine months ended June 30, 2021, which we believe is primarily 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.

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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 the 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 its variants and the duration of any 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 is still uncertain. 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 June 30, 2021

Our sales decreased by approximately $0.1 million, or 1%, to $13.7 million for the three months ended June 30, 2021 as compared to $13.8 million for the three months ended June 30, 2020. The decrease in sales is the result of a decrease of $0.6 million in our HPP segment, partially offset by approximately a $0.5 million increase in our TS segment. Our gross margin percentage remained 31% of sales for the three months ended June 30, 2021 as compared to 31% for the three months ended June 30, 2020. For the three months ended June 30, 2021 there was an operating loss of $0.4 million compared to an operating loss of $0.4 million for the three months ended June 30, 2020, primarily as a result of decreased sales offset by a higher overall gross margin as a percentage of sales. Other income, (expense) net decreased $0.2 million for the three months ended June, 2021 to approximately no income as compared to income of $0.2 million for the three months ended June 30, 2020. This is primarily due to an increase in foreign exchange loss of $0.2 million for the three months ended June 30, 2021 from the prior year period. The income tax expense of $35 thousand for the three months ended June 30, 2021 is primarily driven by incremental state tax expense on an additional quarter of earnings using the discrete effective tax rate method, compared to the income tax expense of $10 thousand for the three months ended June 30, 2020.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended June 30, 2021 and 2020:


			%				%
	June 30, 2021		of sales		June 30, 2020		of sales

	(Dollar amounts in thousands)
Sales	$	13,721	100	%	$	13,780	100	%
Costs and expenses:
Cost of sales		9,492	68	%		9,556	70	%
Engineering and development		700	5	%		693	5	%
Selling, general and administrative		3,886	28	%		3,924	28	%
Total costs and expenses		14,078	103	%		14,173	103	%
Operating loss		(357)	(3)	%		(393)	(3)	%
Other income, (expense) net		(31)	—	%		193	1	%
Loss before income taxes		(388)	(3)	%		(200)	(2)	%
Income tax expense		35	—	%		10	—	%
Net loss	$	(423)	(3)	%	$	(210)	(2)	%

Sales

Our sales decreased by approximately $0.1 million to $13.7 million for the three months ended June 30, 2021 as compared to $13.8 million of sales for the prior year period. The decrease in sales is the result of a decrease of $0.6 million in our HPP segment, partially offset by approximately a $0.5 million increase in our TS segment.

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TS segment sales change was as follows for the three months ended June 30, 2021 and June 30, 2020:


					Increase (decrease)
	2021		2020		$		%

	(Dollar amounts in thousands)
Products	$	9,540	$	9,619	$	(79)	(1)	%
Services		3,223		2,578		645	25	%
Total	$	12,763	$	12,197	$	566	5	%

The decrease in TS segment product sales of $0.1 million during the period is primarily attributable to the U.S. division and the result of decreased sales to several major customers during the period as companies continue the trend of budget freezes or reductions attributable to the pandemic, partially offset with increased sales to new customers. Service sales for the three months ended June 30, 2021 increased $0.6 million from the prior year period. The changes in service sales include increased third party maintenance sales of $0.3 million primarily related to sales of security and cloud based software as well as maintenance (all recorded as net sales), increased internal and third party service sales of $0.2 million, and increased managed services sales of $0.1 million.

HPP segment sales change was as follows for the three months ended June 30, 2021 and 2020:


					Decrease
	2021		2020		$		%

	(Dollar amounts in thousands)
Products	$	602	$	780	$	(178)	(23)	%
Services		356		803		(447)	(56)	%
Total	$	958	$	1,583	$	(625)	(39)	%

The HPP product sales decreased by $0.2 million for the three months ended June 30, 2021 as compared to the prior year period, primarily as a result of a $0.2 million decrease in Myricom product sales. The HPP services sales decreased $0.4 million for the three months ended June 30, 2021 from the prior year period primarily due to decreased royalties on high-speed processing boards related to the E2D program.

Our sales by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the three months ended June 30, 2021 and June 30, 2020:


									Increase (decrease)
	2021		%		2020		%		$		%

	(Dollar amounts in thousands)
Americas	$	12,764	93	%	$	13,320	96	%	$	(556)	(4)	%
Europe		747	5	%		382	3	%		365	96	%
Asia		210	2	%		78	1	%		132	169	%
Totals	$	13,721	100	%	$	13,780	100	%	$	(59)	—	%

The $0.6 million decrease in sales to the Americas is primarily the result of a decrease in the HPP segment of $0.7 million, partially offset with increased sales by our TS segment of $0.1 million. The $0.4 million increase in sales to Europe is primarily the result of increased sales by our TS Segment of $0.3 million combined with a $0.1 million increase from the HPP segment. The sales to Asia increased $0.1 million is primarily the result of an increase from the TS U.S. division.

Gross Margins

Our gross margin ("GM") remained relatively flat at $4.2 million for the three months ended June 30, 2021 as compared to the prior year period. The GM as a percentage of sales remained relatively flat at 31% for the three months

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ended June 30, 2021 as compared to 31% in the prior year period. The GM as a percentage of sales increased in the TS segment, but was offset by a decrease in the HPP segment.


	2021				2020				Increase (decrease)
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
TS	$	3,664	29	%	$	3,173	26	%	$	491	3	%
HPP		565	59	%		1,051	66	%		(486)	(7)	%
Total	$	4,229	31	%	$	4,224	31	%	$	5	—	%

The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2021 and 2020 was as follows:


	2021				2020				Increase (decrease)
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
Products	$	1,748	18	%	$	1,534	16	%	$	214	2	%
Services		1,916	59	%		1,639	64	%		277	(5)	%
Total	$	3,664	29	%	$	3,173	26	%	$	491	3	%

The overall TS segment GM as a percentage of sales increased to 29% for the three month period ended June 30, 2021 compared to 26% for the prior year period. Product GM as a percentage of product sales increased to 18% for the three months ended June 30, 2021 from 16% for the prior year period. 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 period. Service GM as a percentage of service sales decreased to 59% for the three months ended June 30, 2021 from 64% for the prior year period due to both the U.S. and U.K. divisions. The U.S. division had decreased service GM as a percentage of service sales due to additional employees hired to the managed services practice as it continues to grow causing cost of sales to increase because there was not a direct proportion of sales increase. The U.K. division had decreased service sales from the prior year period while service cost of sales remained the same due to fixed costs causing a decrease in service GM as a percentage of service sales.

The impact of product mix within our HPP segment on gross margin for the three months ended June 30, 2021 and 2020 was as follows:


	2021				2020				Increase (Decrease)
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
Products	$	219	36	%	$	265	34	%	$	(46)	2	%
Services		346	97	%		786	98	%		(440)	(1)	%
Total	$	565	59	%	$	1,051	66	%	$	(486)	(7)	%

The overall HPP segment GM as a percentage of sales decreased to 59% for the three months ended June 30, 2021 from 66% for the three months ended June 30, 2020. This 7% decrease is attributed to a relatively larger decrease in services sales compared to a decrease in product sales, which causes overall GM as a percentage of sales to decrease because the services sales is nearly all margin. The increase in product GM was due to a reduction in manufacturing overhead.

Operating Expenses

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment remained relatively flat for the three months ended June 30, 2021 at $0.7 million when compared to the prior year period. The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA SDS cyber security products.

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Selling, General and Administrative Expenses

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended June 30, 2021 and 2020:


	For the three months ended June 30,									$	%
			% of				% of			Increase	Increase
	2021		Total		2020		Total			(decrease)	(decrease)

	(Dollar amounts in thousands)
By Operating Segment:
TS segment	$	2,649	68	%	$	2,801	71	%	$	(152)	(5)	%
HPP segment		1,237	32	%		1,123	29	%		114	10	%
Total	$	3,886	100	%	$	3,924	100	%	$	(38)	(1)	%

SG&A expenses overall of $3.9 million remained relatively flat for the three months ended June 30, 2021 as compared to the prior year period. The approximately $0.2 million decrease in TS segment SG&A expenses compared to the same prior year period is primarily the result of a decrease of payroll. The HPP segment SG&A expenses increased approximately $0.1 million for the three months ended June 30, 2021 as compared to the prior year period due to increased variable compensation expense.

Other Income/Expenses

The following table details other income (expense) for the three months ended June 30, 2021 and 2020:


	For the three months ended
					Increase
	June 30, 2021		June 30, 2020		(Decrease)

	(Amounts in thousands)
Interest expense	$	(131)	$	(56)	$	(75)
Interest income		175		133		42
Foreign exchange (loss) gain		(110)		113		(223)
Other income (expense), net		35		3		32
Total other income (expense), net	$	(31)	$	193	$	(224)

The $224 thousand decrease in total other income (expense), net for the three months ended June 30, 2021 as compared to the prior year period is primarily driven by an increase in foreign exchange loss of $223 thousand. The TS 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 June 30, 2021, which caused the foreign exchange loss.

The interest income increase of $42 thousand for the three months ended June 30, 2021 as compared to the prior year period 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 for details) from the TS-US segment. There were two new agreements that were entered into during the three months ended June 30, 2021.

The interest expense increase of $75 thousand for the three months ended June 30, 2021 as compared to the prior year period is related to two new multi-year agreements with vendors effective in February 2021 in the TS U.S. division. Payments on these agreements contain both principal and interest expense. See Note 10 in Item 1 to this Quarterly Report on Form 10-Q for details.

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Income Taxes

The income tax expense of $35 thousand for the three months ended June 30, 2021 is primarily driven by incremental state tax expense on an additional quarter of earnings using the discrete effective tax rate method, compared to the income tax expense of $10 thousand for the three months ended June 30, 2020. 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 three months ended June 30, 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 nine months ended June 30, 2021

Our sales decreased by approximately $8.3 million, or 17%, to $39.2 million for the nine months ended June 30, 2021 as compared to $47.5 million for the prior year period. The decrease in overall sales for the nine months ended June 30, 2021 as compared to the prior year period is the result of a $7.6 million decrease in our TS segment sales and a $0.7 million decrease in our HPP segment sales. The TS segment decrease is primarily due to decreased sales to several major customers in the U.S. division. Our overall gross margin percentage increased to 31% of sales for nine months ended June 30, 2021 from 27% of sales for the nine months ended June 30, 2020. Our operating loss increased by approximately $0.1 million resulting in an operating loss of $1.0 million for the nine months ended June 30, 2021 as compared to operating loss of $0.9 million for the prior year period, primarily as a result of decreased product sales, which were partially offset by overall increased gross margin as a percentage of sales. Other income, (expense) net increased by $1.2 million primarily due the $2.2 million gain on forgiveness of the Payroll Protection Program loans, partially offset by an increase in foreign exchange loss of $1.0 million. The income tax expense of $868 thousand for the nine months ended June 30, 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 through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the nine months ended June 30, 2020 reflected the recording of a valuation allowance during the quarter, offset by the anticipated tax benefit from the carryback of net operating losses.

The following table details our results of operations in dollars and as a percentage of sales for the nine months ended June 30, 2021 and 2020:


			%				%
	June 30, 2021		of sales		June 30, 2020		of sales

	(Dollar amounts in thousands)
Sales	$	39,197	100	%	$	47,521	100	%
Costs and expenses:
Cost of sales		27,222	69	%		34,783	74	%
Engineering and development		2,191	6	%		2,081	4	%
Selling, general and administrative		10,799	28	%		11,595	24	%
Total costs and expenses		40,212	103	%		48,459	102	%
Operating loss		(1,015)	(3)	%		(938)	(2)	%
Other income, (expense) net		1,764	5	%		565	1	%
Income (loss) before income taxes		749	2	%		(373)	(1)	%
Income tax expense		868	2	%		1,109	2	%
Net loss	$	(119)	—	%	$	(1,482)	(3)	%

Sales

Our total sales decreased by approximately $8.3 million to $39.2 million for the nine months ended June 30, 2021 as compared to $47.5 million of sales for the prior year period.

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TS segment sales change was as follows for the nine months ended June 30, 2021 and 2020:


					Increase (decrease)
	2021		2020		$		%

	(Dollar amounts in thousands)
Products	$	27,032	$	34,635	$	(7,603)	(22)	%
Services		8,763		8,787		(24)	—	%
Total	$	35,795	$	43,422	$	(7,627)	(18)	%

The decrease in TS segment product sales of $7.6 million for the nine months ended June 30, 2021 as compared to the prior year period is the result of a decrease of $8.6 million in our U.S. division, partially offset by a $1.0 million increase in our U.K. division. The $8.6 million decrease in the U.S. division product sales is the result of decreased sales to several major customers. The $1.0 million increase in the U.K. division product sales is due to increased sales to one customer that did not occur in the prior year period. TS segment service sales remained relatively flat at $8.7 million when compared to the prior year period. The U.S. division had increased service sales of $0.1 million and the U.K. division had a decrease of $0.1 million. The change in service sales of the U.S. division is primarily the result of an increase of $1.0 million in third party maintenance sales primarily related to sales of security and cloud based software as well as maintenance (all recorded as net sales) and a $0.5 million increase in managed service contract sales, partially offset by a decrease of $1.4 million in third party decrease in internal and third party service sales.

HPP segment sales change was as follows for the nine months ended June 30, 2021 and 2020:


					Increase (decrease)
	2021		2020		$		%

	(Dollar amounts in thousands)
Products	$	2,494	$	2,469	$	25	1	%
Services		908		1,630		(722)	(44)	%
Total	$	3,402	$	4,099	$	(697)	(17)	%

The HPP product sales remained relatively flat for the nine months ended June 30, 2021 as compared to the prior year period, which is primarily due to increased Multicomputer sales of approximately $0.4 million, offset by a decrease of $0.4 million from Myricom product sales. The decrease in HPP services sales of approximately $0.7 million is primarily the result of a $0.4 million decrease in royalty sales on high-speed processing boards related to the E2D program combined with decreased repair sales of $0.3 million.

Our sales by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the nine months ended June 30, 2021 and 2020:


									Increase (decrease)
	2021		%		2020		%		$		%

	(Dollar amounts in thousands)
Americas	$	35,547	91	%	$	45,588	95	%	$	(10,041)	(22)	%
Europe		3,067	8	%		1,664	4	%		1,403	84	%
Asia		583	1	%		269	1	%		314	117	%
Totals	$	39,197	100	%	$	47,521	100	%	$	(8,324)	(18)	%

The $10.0 million decrease in the Americas sales for the nine months ended June 30, 2021 as compared to the same prior year period is primarily due to decreased sales by our TS U.S. division of $8.9 million and decreased sales by our HPP segment of $1.1 million. The $1.4 million increase in Europe sales for the nine month period ended June 30, 2021 as compared to the prior year period is primarily due to increased sales by our TS U.K. division of $0.9 million, increased sales by our TS U.S. division of $0.2 million, and increased sales in our HPP segment of $0.2 million. The $0.3 million increase in Asia sales for the nine month period ended June 30, 2021 as compared to the prior year period is primarily due to increased sales by our HPP segment of $0.2 million and increased sales by our TS U.S. division of $0.1 million.

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Gross Margins

Our gross margin ("GM") decreased by approximately $0.7 million to $12.0 million for the nine months ended June 30, 2021 as compared to a gross margin of $12.7 million for the prior year period. However, the GM as a percentage of sales increased to 31% for the nine months ended June 30, 2021 from 27% for the prior year period.


	2021				2020				Increase (Decrease)

	(Dollar amounts in thousands)
	GM$		GM%		GM$		GM%		GM$		GM%
TS	$	9,985	28	%	$	10,353	24	%	$	(368)	4	%
HPP		1,990	58	%		2,385	58	%		(395)	—	%
Total	$	11,975	31	%	$	12,738	27	%	$	(763)	4	%

The impact of product mix within our TS segment on gross margin for the nine months ended June 30, 2021 and 2020 is as follows:


	2021				2020				Increase (decrease)
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
Products	$	4,728	17	%	$	5,026	15	%	$	(298)	2	%
Services		5,257	60	%		5,327	61	%		(70)	(1)	%
Total	$	9,985	28	%	$	10,353	24	%	$	(368)	4	%

The overall TS segment GM as a percentage of sales increased to 28% for the nine months ended June 30, 2021 from 24% for the same prior year period. The 2% 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 period. GM on services as a percentage of services sales had a slight decrease of 1% compared to the prior year period as there were additional employees hired to the managed services practice as it continues to grow.

The impact of product mix within our HPP segment on gross margin for the nine months ended June 30, 2021 and 2020 is as follows:


	2021				2020				Increase (Decrease)

	(Dollar amounts in thousands)
	GM$		GM%		GM$		GM%		GM$		GM%
Products	$	1,120	45	%	$	841	34	%	$	279	11	%
Services		870	96	%		1,544	95	%		(674)	1	%
Total	$	1,990	58	%	$	2,385	58	%	$	(395)	—	%

The overall HPP segment GM as a percentage of sales remained relatively flat at 58% compared to the prior year period. Product GM as a percentage of product sales increased by 11% from the prior year period due to the increased Multicomputer product sales, which are higher margin than the Myricom sales. Myricom sales also decreased compared to the prior year period contributing to the increased product GM as a percentage of product sales.

Operating Expenses

Engineering and Development Expenses

Engineering and development expenses increased by $0.1 million to $2.2 million for the nine months ended June 30, 2021 as compared to the prior year period. The current period expenses were primarily for product engineering expenses incurred in connection with continued development of the ARIA SDS cyber security products.

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Selling, General and Administrative Expenses

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the nine months ended June 30, 2021 and 2020:


	For the nine months ended June 30,									$	%
			% of				% of			Increase	Increase
	2021		Total		2020		Total			(decrease)	(decrease)

	(Dollar amounts in thousands)
By Operating Segment:
TS segment	$	7,435	69	%	$	8,239	71	%	$	(804)	(10)	%
HPP segment		3,364	31	%		3,356	29	%		8	—	%
Total	$	10,799	100	%	$	11,595	100	%	$	(796)	(7)	%

SG&A expenses decreased by approximately $0.8 million, or 7%, for the nine months ended June 30, 2021 as compared to the prior year period. The $0.8 million decrease in TS segment expenses is primarily attributed to decreased payroll, variable compensation expenses, and travel expenses. The HPP segment remained relatively flat for the nine months ended June 30, 2021 as compared to the prior year period with slightly increased consulting expenses offset by decreased salary expenses.

Other Income/Expenses

The following table details other income (expense) for the nine months ended June 30, 2021 and 2020:


	For the nine months ended
					$ Increase
	June 30, 2021		June 30, 2020		(Decrease)

	(Amounts in thousands)
Interest expense	$	(244)	$	(168)	$	(76)
Interest income		406		469		(63)
Foreign exchange (loss) gain		(731)		257		(988)
Gain on debt forgiveness		2,196		—		2,196
Other income, net		137		7		130
Total other income (expense), net	$	1,764	$	565	$	1,199

The $1.2 million increase to total other income (expense), net for the nine months ended June 30, 2021 as compared to the prior year period is primarily driven by a gain on debt forgiveness of $2.2 million, partially offset by an increase in foreign exchange loss of $1.0 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 nine months ended June 30, 2021, which caused the foreign exchange loss.

The decrease in interest income of $63 thousand 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 for details) from the TS-US segment as interest income recognized in each agreement decreases as principal payments are made.

The interest expense increase of $76 thousand for the nine months ended June 30, 2021 as compared to the prior year period is related to two new multi-year agreements with vendors effective in February 2021 in the TS U.S. division. Payments on these agreements contain both principal and interest expense. See Note 10 in Item 1 to this Quarterly Report on Form 10-Q.

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Income Taxes

The income tax expense of $868 thousand for the nine months ended June 30, 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 through the Paycheck Protection Program. The deferred tax asset change is a non-cash item. The income tax expense for the nine months ended June 30, 2020 reflected the recording of a valuation allowance 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 June 30, 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 $0.4 million to $19.7 million as of June 30, 2021 from $19.3 million as of September 30, 2020.

Our significant source of cash for the nine months ended June 30, 2021 included an increase in accounts payable and accrued expenses of $3.8 million and other long-term liabilities of $4.4 million.

Our significant uses of cash for the nine months ended June 30, 2021 are primarily related to the increase of accounts receivable and long-term receivable of $7.4 million and a decrease in operating lease liabilities of $0.4 million.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $9.9 million as of June 30, 2021, which consisted of 0.5 million Euros, 0.3 million British Pounds, and 8.5 million U.S. Dollars. This cash is included in our total cash and cash equivalents reported within our financial statements.

As of June 30, 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 $13.3 million and $13.4 million were available as of June 30, 2021 and September 30, 2020, respectively. As of June 30, 2021 and September 30, 2020 there were no cash withdrawals outstanding. For a further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 10 “Notes Payable and Line of Credit”.

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 sales 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.

During the third 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 sales for the transactions. These agreements combined involved us receiving approximately $5.1 million over two years.

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.

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If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition, retain key employees, or continue to effectively operate our business.

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

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 June 30, 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 June 30, 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 nine months ended June 30, 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.

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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.

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 June 30, 2021 and September 30, 2020, (b) our Consolidated Statements of Income for the three and nine months ended June 30, 2021 and 2020, (c) our Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2021 and 2020, (d) our Consolidated Statement of Shareholders’ Equity for the three and nine months ended June 30, 2021 and 2020, (e) our Consolidated Statements of Cash Flows for the nine months ended June 30, 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.

August 12, 2021	By:	/s/ Victor Dellovo
		Victor Dellovo
		Chief Executive Officer,
		President and Director

August 12, 2021	By:	/s/ Gary W. Levine
		Gary W. Levine
		Chief Financial Officer

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CSP (CSPI) 10-Q2021 Q3 Quarterly report

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