CSP 10Q 2023 Q1 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 December 31, 2022

◻ 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 February 2, 2023, the registrant had 4,667,788 shares of common stock issued and outstanding.

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INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of December 31, 2022 (unaudited) and September 30, 2022 (audited)	3

	Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and 2021 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 31, 2022 and 2021 (unaudited)	5

	Condensed Consolidated Statement of Shareholders’ Equity for the three months ended December 31, 2022 and 2021 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2022 and 2021 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION
Item 1A.	Risk factors	28

Item 6.	Exhibits	28

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)


	December 31,		September 30,
	2022		2022
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	19,585	$	23,982
Accounts receivable, net of allowances of $115 and $88		22,232		22,993
Investment in lease, net-current portion		17		17
Inventories		4,116		4,372
Refundable income taxes		918		1,050
Other current assets		6,764		7,043
Total current assets		53,632		59,457


Property, equipment and improvements, net		604		647
Operating lease right-of-use assets		1,011		1,160
Intangibles, net		57		10
Investment in lease, net-less current portion		11		3
Long-term receivable		6,932		7,412
Cash surrender value of life insurance		5,194		5,163
Pension benefits assets		1,421		1,099
Other assets		112		111
Total assets	$	68,974	$	75,062

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	15,298	$	22,463
Line of credit		3,449		3,124
Notes payable - current portion		432		427
Deferred revenue		3,775		4,058
Pension and retirement plans		110		110
Total current liabilities		23,064		30,182
Pension and retirement plans		1,295		1,337
Notes payable - noncurrent portion		—		449
Operating lease liabilities - noncurrent portion		531		623
Income taxes payable		462		462
Other noncurrent liabilities		2,912		3,046
Total liabilities		28,264		36,099

Shareholders’ equity:
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,555 and 4,554 shares, respectively		46		46
Additional paid-in capital		19,735		19,476
Retained earnings		27,593		26,769
Accumulated other comprehensive loss		(6,664)		(7,328)
Total shareholders’ equity		40,710		38,963
Total liabilities and shareholders’ equity	$	68,974	$	75,062

See accompanying notes to unaudited condensed consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except for per share data)

(Unaudited)


	Three months ended
	December 31,		December 31,
	2022		2021
Sales:
Product	$	14,221	$	8,720
Services		4,123		3,649
Total sales		18,344		12,369

Cost of sales:
Product		10,771		7,277
Services		1,756		1,478
Total cost of sales		12,527		8,755

Gross profit		5,817		3,614

Operating expenses:
Engineering and development		836		627
Selling, general and administrative		3,617		3,383
Total operating expenses		4,453		4,010
Operating income (loss)		1,364		(396)

Other income (expense):
Foreign exchange loss		(501)		(17)
Interest expense		(64)		(105)
Interest income		261		145
Other (expense) income, net		34		19
Total other (expense) income, net		(270)		42
Income (loss) before income taxes		1,094		(354)
Income tax expense		133		12
Net income (loss)	$	961	$	(366)
Net income (loss) attributable to common shareholders	$	906	$	(366)

Net income (loss) per common share - basic	$	0.21	$	(0.09)
Weighted average common shares outstanding – basic		4,295		4,200

Net income (loss) per common share - diluted	$	0.21	$	(0.09)
Weighted average common shares outstanding – diluted		4,328		4,200

See accompanying notes to unaudited condensed consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)


	Three months ended
	December 31,		December 31,
	2022		2021
Net income (loss)	$	961	$	(366)
Foreign currency translation gain adjustments, net		664		29
Total comprehensive income (loss)	$	1,625	$	(337)

See accompanying notes to unaudited condensed consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended December 31, 2022 and 2021:

(Amounts in thousands, except per share data)

(Unaudited)


								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
Three months ended December 31, 2022:	Shares	Amount		Capital		Earnings		loss		Equity
Balance as of September 30, 2022	4,554	$	46	$	19,476	$	26,769	$	(7,328)	$	38,963
Net income	—		—		—		961		—		961
Other comprehensive income	—		—		—		—		664		664
Stock-based compensation	—		—		253		—		—		253
Restricted stock issuance	1		—		6		—		—		6
Cash dividends declared on common stock ($0.03 per share)			—		—		(137)		—		(137)
Balance as of December 31, 2022	4,555	$	46	$	19,735	$	27,593	$	(6,664)	$	40,710

								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
Three months ended December 31, 2021:	Shares	Amount		Capital		Earnings		loss		Equity
Balance as of September 30, 2021	4,394	$	45	$	18,258	$	25,191	$	(9,448)	$	34,046
Net loss	—		—		—		(366)		—		(366)
Other comprehensive income	—		—		—		—		29		29
Stock-based compensation	—		—		225		—		—		225
Restricted stock cancellation	—		(1)		—		—		—		(1)
Balance as of December 31, 2021	4,394	$	44	$	18,483	$	24,825	$	(9,419)	$	33,933

See accompanying notes to unaudited condensed consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Three months ended
	December 31,		December 31,
	2022		2021
Operating activities
Net income (loss)	$	961	$	(366)

Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		86		92
Amortization of intangibles		4		2
Foreign exchange loss		501		17
Provision for losses on accounts receivable		25		1
Provision for obsolete inventory		48		5
Amortization of lease right-of-use assets		149		202
Stock-based compensation expense on stock options and restricted stock awards		259		225
Increase in cash surrender value of life insurance		(31)		(32)

Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		718		(436)
Decrease (increase) in inventories		208		(203)
Decrease in refundable income taxes		133		12
Increase in operating lease right-of-use assets		(1)		(36)
Decrease (increase) in other assets		284		(878)
(Increase) decrease in investment in lease		(8)		19
Decrease in long-term receivable		480		1,924
Decrease in accounts payable and accrued expenses		(7,232)		(833)
Increase in interest payable		18		15
Decrease in operating lease liabilities		(144)		(164)
(Decrease) increase in deferred revenue		(284)		327
Decrease in pension and retirement plans liabilities		(267)		(168)
Decrease in other long-term liabilities		(134)		—
Net cash used in operating activities		(4,227)		(275)

Investing activities
Life insurance premiums paid		—		(60)
Proceeds from sales of property, equipment, and improvements		—		1
Additions of intangible assets		(51)		—
Purchases of property, equipment and improvements		(44)		(137)
Net cash used in investing activities		(95)		(196)

Financing activities
Net borrowing under line-of-credit agreement		325		203
Repayments on notes payable		(449)		(472)
Principal payments on finance leases		(1)		(11)
Net cash used in financing activities		(125)		(280)
Effects of exchange rate on cash		50		39
Net decrease in cash and cash equivalents		(4,397)		(712)
Cash and cash equivalents beginning of year		23,982		20,007
Cash and cash equivalents end of year	$	19,585	$	19,295

Supplementary cash flow information:
Cash paid for interest	$	70	$	184
Dividend declared during period	$	137	$	—

Supplementary non-cash financing activities:
Customer financing for inventory sold (see Note 6 Accounts and Long-Term Receivable for details)	$	2,852	$	450

See accompanying notes to unaudited condensed consolidated financial statements.

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CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2022

Organization and Business

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

1. Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared by the Company 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 condensed consolidated financial statements should be read in conjunction with the notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

2. Use of Estimates

The preparation of condensed 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

New accounting standards not adopted as of December 31, 2022

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.

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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 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 Myricom, Multicomputer, 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. Multicomputer revenue is derived from the sale of hardware, software, extended warranties, royalties, and repair services.

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See disaggregated revenues below by products/services and divisions/segments.


			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
Three months ended December 31,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2022
Sales:
Product	$	2,162	$	191	$	11,867	$	12,058	$	14,220
Service		327		87		3,709		3,796		4,123
Finance *		—		—		1		1		1
Total sales	$	2,489	$	278	$	15,577	$	15,855	$	18,344

			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
Three months ended December 31,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2021
Sales:
Product	$	720	$	62	$	7,938	$	8,000	$	8,720
Service		344		93		3,212		3,305		3,649
Total sales	$	1,064	$	155	$	11,150	$	11,305	$	12,369

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

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.

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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 includes 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 $3.7 million and $4.4 million as of December 31, 2022 and September 30, 2022, respectively. The current portion is recorded in other current assets on the condensed consolidated balance sheets. There were no noncurrent contract assets as of December 31, 2022 and September 30, 2022. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before we transfer a good or service to the customer. Current contract liabilities were $3.8 million and $1.9 million as of December 31, 2022 and September 30, 2022, respectively. The current portion of contract liabilities is recorded in deferred revenue on the condensed consolidated balance sheets. There was no long-term contract liabilities as of December 31, 2022 and September 30, 2022, respectively. Revenue recognized for the three months ended December 31, 2022 that was included in contract liabilities as of September 30, 2022 was $1.2 million.

Contract Costs

Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are equal to or less than a one year period, are expensed as incurred, utilizing the practical expedient in ASC 340-40-25-4. For a period greater than one year, incremental contract costs are capitalized if 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 condensed consolidated balance sheets as of December 31, 2022 and September 30, 2022. The portion of current capitalized costs were $88 thousand and $128 thousand as of December 31, 2022 and September 30, 2022, respectively. There are no noncurrent capitalized costs on the condensed 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 December 31, 2022 and 2021 were $98 thousand and $90 thousand, respectively. This is recorded in selling, general, and administrative expenses. There was no impairment related to incremental costs capitalized during the nine months ended December 31, 2022 and 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 condensed consolidated balance sheets. The portion of current capitalized costs were $6 thousand as of December 31, 2022 and $9 thousand as of September 30, 2022. The were no noncurrent capitalized costs as of December 31, 2022 and September 30, 2022, respectively. The amount of fulfillment costs amortized for the three months ended December 31, 2022 and 2021 were $3 thousand and $3 thousand, respectively. These costs amortized were recorded in cost of sales. There was no impairment related to fulfillment costs capitalized for the three months ended December 31, 2022 and 2021.

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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 condensed 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 December 31, 2022 is set forth in the table below:


	(Amounts in thousands)
Fiscal 2023		455
Fiscal 2024		61
	$	516

5. Earnings Per Share of Common Stock

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

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

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


	Three months ended
	December 31,		December 31,
	2022		2021

Net income (loss)	$	961	$	(366)
Less: net income attributable to nonvested common stock		55		—
Net income (loss) attributable to common shareholders	$	906	$	(366)

Weighted average total shares outstanding – basic		4,554		4,200
Less: weighted average non–vested shares outstanding		259		—
Weighted average number of common shares outstanding – basic		4,295		4,200
Add: potential common shares from non–vested stock awards and the assumed exercise of stock options		33		—
Weighted average common shares outstanding – diluted	$	4,328	$	4,200

Net income (loss) per common share - basic		0.21		(0.09)
Net income (loss) per common share - diluted		0.21		(0.09)

Anti-dilutive securities include restricted stock, which are excluded from the diluted income (loss) per share computation. Non-vested restricted stock awards of 194 thousand were excluded from the diluted loss per share calculation for the three months ended December 31, 2021. These awards were excluded because there was a net loss for this period 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 $8.7 million and $6.9 million as of December 31, 2022. These receivables are included in Accounts receivable and Long-term receivable in the amount of $8.9 million and $7.4 million as of September 30, 2022, respectively.

The receivables with a payment term exceeding one year carry an average weighted interest rate of 5.0%, which reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement.

There is not an allowance for credit losses nor impairments for Accounts and Long-term receivables with a contractual maturity of over one year. All accounts have no past amounts due as of December 31, 2022 and September 30, 2022. There was no activity in the allowance for credit losses of these receivables for the three months ended December 31, 2022 and 2021, 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 December 31, 2022 and 2021 was $182 thousand and $139 thousand, respectively. Interest income from these agreements is recorded in Other income (expense), net on the Condensed Consolidated Statements of Operations.

There was one new agreement effective in the first quarter of fiscal year 2023 causing an increase in Accounts and Long-term receivable. This agreement included approximately $3.0 million of payments to be received over the next

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2 years from the effective date of the agreement. The revenue for this transaction was recorded net during the first quarter of fiscal year 2023.

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)
2023	$	7,232
2024		6,859
2025		2,313
Total payments	$	16,404
Less: unearned interest income		(843)
Total, net of unearned interest income	$	15,561

7. Inventories

Inventories consist of the following:


	December 31,		September 30,
	2022		2022

	(Amounts in thousands)
Raw materials	$	344	$	421
Work-in-process		205		23
Finished goods		3,567		3,928
Total	$	4,116	$	4,372

We evaluate inventory for obsolescence on at least a quarterly basis or more frequently if needed. Our HPP segment has a multi-faceted approach in determining obsolescence including reviewing inventory by product line, program, and individual part. In the TS segment, we seek to minimize obsolete inventory by having nearly all of our inventory purchased in conjunction with a sales agreement. From time to time, we do purchase certain inventory in bulk to receive discounts, but only when we anticipate selling this inventory. The inventory we purchase at the TS segment is in high demand, especially in the current environment, and has a limited risk of obsolescence.

Several components used in our HPP segment products are obtained from sole-source suppliers. We are dependent on key vendors such as ADP, NXP, and BCRM for a variety of processors for certain products. We are dependent on NVIDIA for our high-speed interconnect components and Marvel for Myricom components. Despite our dependence on these sole-source suppliers, based on our current forecast and our projected sales obligations, we believe we have adequate inventory on hand and our current near-term requirements can be met in the existing supply chain.

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8. Leases

Information related to both lessee and lessor

The components of lease costs for the three months ended December 31, 2022 and 2021 are as follows:


		Three months ended
	Condensed Consolidated Statements of Operations Location	December 31, 2022		December 31, 2021
		(Amounts in thousands)
Finance Lease:
Interest on lease liabilities	Interest expense	$	—	$	1
Operating Lease:
Operating lease cost	Selling, general, and administrative		162		179
Short-term lease cost	Selling, general, and administrative		10		12
Total lease costs		$	172	$	192
Less sublease interest income	Revenue		(1)		—
Total lease costs, net of sublease interest income		$	171	$	192

Supplemental cash flow information related to leases for three months ended December 31, 2022 and 2021 is below:


	Three months ended
	December 31, 2022		December 31, 2021
	(Amounts in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	166	$	187
Operating cash flows from short-term leases		10		12
Operating cash flows from finance leases		—		1
Financing cash flows from finance leases		1		11
Cash received from subleases		5		18

9. Accounts payable and accrued expenses, and Other noncurrent liabilities

The Company enters into certain multi-year agreements with vendors when also entering into some of the multi-year contracts the Company enters into with customers. See Note 6, “Accounts and Long-Term Receivable” for further information related to the multi-year agreements with customers.

There was not an interest rate stated in the agreements 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 the 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 December 31, 2022 and 2021 was $56 thousand and $74 thousand, respectively.

The amounts owed for these agreements are in Accounts payable and Other noncurrent liabilities because they are owed to vendors 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.

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


	December 31, 2022		September 30, 2022
	(Amounts in thousands)
Current	$	1,758	$	1,758
Less: discount		165		184
Accounts payable and accrued expenses	$	1,593	$	1,574

Noncurrent	$	3,015	$	3,186
Less: discount		103		138
Other noncurrent liabilities	$	2,912	$	3,048

The Company had a total of approximately $8.3 million due (net of interest) to one of these vendors as of December 31, 2022. This is approximately 46% of Accounts payable and other noncurrent liabilities. The Company had a total of approximately $16.1 million due (net of interest) to one of these vendors as of September 30, 2022. This is approximately 63% of Accounts payable and other noncurrent liabilities. The TS segment has many vendors it transacts with and does not have any specific agreement with this vendor that it must purchase certain products from the vendor. Management believes other suppliers could provide similar products on comparable terms.

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.

Interest expense related to the notes for the three months ended December 31, 2022 and 2021 was $5 thousand and $14 thousand, respectively.


	December 31, 2022		September 30, 2022
	(Amounts in thousands)
Current	$	449	$	449
Less: notes discount		17		22
Notes payable - current portion	$	432	$	427

Noncurrent	$	—	$	449
Less: notes discount		—		—
Notes payable - noncurrent portion	$	—	$	449

As of December 31, 2022 and September 30, 2022, the Company maintained an inventory line of credit with a borrowing capacity of $15.0 million. It may be used by the TS and HPP segments in the U.S. to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. No interest accrues under the inventory line of credit when advances are paid within terms, however, late payments are subject to an interest charge of Prime plus 5%. The credit agreement for the inventory line of credit contains financial covenants which require the Company to maintain the following TS segment-specific financial ratios: (1) a minimum current ratio of 1.2, (2) tangible net worth of no less than $4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0:1. As of December 31, 2022 and September 30, 2022, Company borrowings, all from the TS segment, under the inventory line of credit were $3.4 million and $3.1 million, respectively, and the Company was in compliance with all financial covenants. As of December 31, 2022 and September 30, 2022, this line of credit also includes availability of a limited cash withdrawal of up to $1.0 million. As of December 31, 2022 and September 30, 2022 there were no cash withdrawals outstanding.

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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 current 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 condensed 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 December 31,
	2022						2021
	U.K.		U.S.		Total		U.K.		U.S.		Total

	(Amounts in thousands)
Pension:
Interest cost	$	106	$	4	$	110	$	71	$	2	$	73
Expected return on plan assets		(142)		—		(142)		(122)		—		(122)
Amortization of past service costs		2		—		2		2		—		2
Amortization of net (gain) loss		—		(1)		(1)		25		—		25
Net periodic (benefit) cost	$	(34)	$	3	$	(31)	$	(24)	$	2	$	(22)

Post Retirement:
Service cost	$	—	$	6	$	6	$	—	$	11	$	11
Interest cost		—		15		15		—		12		12
Amortization of net (gain) loss		—		(49)		(49)		—		(2)		(2)
Net periodic benefit	$	—	$	(28)	$	(28)	$	—	$	21	$	21

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


	Fair Values as of
	December 31, 2022								September 30, 2022
	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	$	64	$	64	$	—	$	—	$	27	$	27	$	—	$	—
Pooled funds		9,918		6,285		3,633		—		8,798		5,513		3,285		—
Total plan assets	$	9,982	$	6,349	$	3,633	$	—	$	8,825	$	5,540	$	3,285	$	—

12. Income Taxes

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a full valuation allowance on their operations but will continue to evaluate this need going forward. The income tax expense for the three months ended December 31, 2021 was 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 (PPP).

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 December 31, 2022 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.

13. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:


	December 31,		September 30,
	2022		2022

	(Amounts in thousands)
Cumulative effect of foreign currency translation, net	$	(5,127)	$	(5,791)
Cumulative unrealized loss on pension liability		(1,537)		(1,537)
Accumulated other comprehensive loss, net	$	(6,664)	$	(7,328)

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 no assets or liabilities measured at fair value on a recurring (except our pension plan assets and whole life insurance policies, see Note 11 for pension plan assets) or non-recurring basis as of December 31, 2022 or September 30, 2022.

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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 December 31, 2022				As of September 30, 2022
		Carrying Amount		Fair Value		Carrying Amount		Fair Value	Fair Value Level	Reference

		(Amounts in thousands)
Assets:
Cash and cash equivalents	$	19,585	$	19,585	$	23,982	$	23,982	1	Condensed Consolidated Balance Sheets
Accounts and long-term receivable*		15,561		15,561		16,328		16,328	3	Note 6
Liabilities:
Accounts payable and accrued expenses and other long-term liabilities*		4,505		4,505		4,622		4,622	3	Note 9
Line of Credit		3,449		3,449		3,124		3,124	2	Note 10
Notes payable		432		432		876		876	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 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 December 31, 2022 and September 30, 2022.

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15. Segment Information

The following tables present certain operating segment information for the three ended December 31, 2022 and 2021.


			Technology Solutions Segment
	High
	Performance
	Products		United						Consolidated
Three months ended December 31,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2022
Sales:
Product	$	2,162	$	191	$	11,868	$	12,059	$	14,221
Service		327		87		3,709		3,796		4,123
Total sales	$	2,489	$	278	$	15,577	$	15,855	$	18,344
Operating (loss) income	$	(98)	$	14	$	1,448	$	1,462	$	1,364
Interest income	$	1	$	35	$	225	$	260	$	261
Interest expense	$	(3)	$	—	$	(61)	$	(61)	$	(64)
Total assets	$	9,973	$	6,713	$	52,288	$	59,001	$	68,974
Capital expenditures	$	16	$	—	$	28	$	28	$	44
Depreciation and amortization	$	29	$	—	$	61	$	61	$	90

2021
Sales:
Product	$	720	$	62	$	7,938	$	8,000	$	8,720
Service		344		93		3,212		3,305		3,649
Total sales	$	1,064	$	155	$	11,150	$	11,305	$	12,369
Operating (loss) income	$	(1,005)	$	(55)	$	664	$	609	$	(396)
Interest income	$	—	$	7	$	138	$	145	$	145
Interest expense	$	(17)	$	—	$	(88)	$	(88)	$	(105)
Total assets	$	9,056	$	9,397	$	43,333	$	52,730	$	61,786
Capital expenditures	$	45	$	—	$	92	$	92	$	137
Depreciation and amortization	$	35	$	—	$	59	$	59	$	94

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 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 months ended December 31, 2022 and 2021.


	Three months ended December 31,
	2022				2021
	(in millions)				(in millions)
	Customer		% of Total		Customer		% of Total
	Revenues		Revenues		Revenues		Revenues

Customer A	$	1.8	10	%	$	1.9	16	%
Customer B	$	2.1	12	%	$	0.9	7	%
Customer C	$	1.8	10	%	$	—	-	%

Customer A had a balance of $13.6 million, or 47%, of total consolidated accounts receivable and long-term receivable as of December 31, 2022. Customer A had a balance of $16.2 million, or 52%, of total consolidated accounts

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receivable and long-term receivable as of September 30, 2022. There were no other customers with more than 10% of total consolidated accounts receivable and long-term receivable as of September 30, 2022 and December 31, 2022. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with any customers as of December 31, 2022.

16. Dividend

On December 6, 2022, the Company’s board of directors declared a cash dividend of $0.03 per share which was paid on January 6, 2023 to shareholders of record as of December 21, 2022, the record date.

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, 2022. 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, changes in the U.S. Tax laws, continued disruptions in the supply chain and inflationary pressures, the impact of the Ukraine-Russian military conflict on global trade and financial markets, 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, 2022.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an 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, 2022 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management believes there have been no significant changes for the three months ended December 31, 2022 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

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Observations on effects of novel coronavirus and Russia/Ukraine Conflict

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 safely 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.

COVID-19 has adversely affected the distribution channel leading to significantly longer lead times when ordering product. Manufacturers are not producing as much product as prior to the pandemic due to disruptions, resulting in supply shortages. Additionally, recent global shipping delays have exacerbated this problem. The TS segment has many vendors it transacts with and supply shortages are pervasive with many of them. The HPP segment has and continues to experience shortages with their vendors as well. If we are unable to successfully resolve these disruptions and shortages, the timing and amount of our future results may be materially impacted. The HPP segment secured a $1.8 million contract for real-time networking monitoring for cyber attack detection in the first quarter of fiscal year 2022, but due to the delays by manufacturers the sale was recognized fully in revenue in the first quarter of fiscal year 2023 when we obtained the product from the manufacturers. Related to the supply shortage and potentially inflation, we have experienced price increases for our products, which we try to pass on to the customer.

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.

As of December 31, 2022, the Russian/Ukrainian military conflict has not had a direct significant impact on revenue as we do not have any recurring customers in either country. However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of the Russian-Ukraine military conflict and geopolitical tensions related to such military conflict could adversely affect our business, financial condition and results of operations, by among other things, cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets. It is not possible at this time to predict the size of the impact or consequences of the conflict to the Company and our customers and suppliers.

Results of Operations.

Overview of the three months ended December 31, 2022

Our sales increased by approximately $5.9 million, or 48%, to $18.3 million for the three months ended December 31, 2022 as compared to $12.4 million for the three months ended December 31, 2021. The increase in sales is the result of an increase of $4.5 million in our TS segment combined with a $1.4 million increase in our HPP segment. Our gross margin percentage increased to 32% of sales for the three months ended December 31, 2022 as compared to 29% for the three months ended December 31, 2021. For the three months ended December 31, 2022 there was an operating income

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of $1.4 million compared to an operating loss of $0.4 million for the three months ended December 31, 2021. Other income, (expense) net decreased $0.3 million for the three months ended to December 31, 2022 as compared to the three months ended December 31, 2021. An income tax expense of $133 thousand was recorded for the three months ended December 31, 2022 compared to an income tax expense of $12 thousand in the same period of fiscal year 2022.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended December 31, 2022 and 2021:


			%				%
	December 31, 2022		of sales		December 31, 2021		of sales

	(Dollar amounts in thousands)
Sales	$	18,344	100	%	$	12,369	100	%
Costs and expenses:
Cost of sales		12,527	68	%		8,755	71	%
Engineering and development		836	5	%		627	5	%
Selling, general and administrative		3,617	20	%		3,383	27	%
Total costs and expenses		16,980	93	%		12,765	103	%
Operating income (loss)		1,364	7	%		(396)	(3)	%
Other income (expense), net		(270)	(1)	%		42	—	%
Income (loss) before income taxes		1,094	6	%		(354)	(3)	%
Income tax expense		133	1	%		12	—	%
Net income (loss)	$	961	5	%	$	(366)	(3)	%

Sales

Our sales increased by approximately $5.9 million to $18.3 million for the three months ended December 31, 2022 as compared to $12.4 million for the prior year period. The increase in sales is the result of an increase of $4.5 million in our TS segment combined with a $1.4 million increase in our HPP segment.

TS segment sales change was as follows for the three months ended December 31, 2022 and 2021:


	December 31,				Increase
	2022		2021		$		%

	(Dollar amounts in thousands)
Products	$	12,059	$	8,000	$	4,059	51	%
Services		3,796		3,305		491	15	%
Total	$	15,855	$	11,305	$	4,550	40	%

The increase in TS segment product sales of $4.1 million during the period is primarily attributable to an increase in the U.S. division due to increased sales to several major customers. Service sales for the three months ended December 31, 2022 increased $0.5 million from the prior year period, which is attributable to the U.S. division. The increase in service sales included increased third party maintenance sales of $0.4 million, increased managed services sales of $0.3 million, partially offset with decreased internal and third party service sales of $0.2 million.

HPP segment sales change was as follows for the three months ended December 31, 2022 and 2021:


	December 31,				Increase (decrease)
	2022		2021		$		%

	(Dollar amounts in thousands)
Products	$	2,162	$	720	$	1,442	200	%
Services		327		344		(17)	(5)	%
Total	$	2,489	$	1,064	$	1,425	134	%

The HPP product sales increased by $1.4 million for the three months ended December 31, 2022 as compared to the prior year period primarily as a result of one large Myricom product order placed in the first quarter of fiscal year 2022,

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but due to supply chain delays was not fully fulfilled until the first quarter of fiscal year 2023. The HPP services sales remained relatively flat for the three months ended December 31, 2022 compared to the prior year period as a result of ARIA revenue increasing $0.1 million, which was offset with a decrease of $0.1 million in 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 December 31, 2022 and 2021:


	December 31,								Increase (decrease)
	2022		%		2021		%		$		%

	(Dollar amounts in thousands)
Americas	$	17,940	97	%	$	11,625	94	%	$	6,315	54	%
Europe		288	2	%		635	5	%		(347)	(55)	%
Asia		116	1	%		109	1	%		7	6	%
Totals	$	18,344	100	%	$	12,369	100	%	$	5,975	48	%

The $6.3 million increase in sales to the Americas was primarily the result of an increase in the TS segment’s U.S. division of $4.8 million combined with sales by our HPP segment of $1.5 million. The $0.3 million decrease in sales to Europe was primarily the result of decreased sales by our TS segment’s U.S. division of $0.2 million combined with a decrease in the HPP division of $0.1 million. The sales to Asia remained relatively flat compared to prior year without any significant changes in any divisions.

Gross Margins

Our gross margin ("GM") increased $2.2 million for the three months ended December 31, 2022 as compared to the prior year period. The GM as a percentage of sales increased to 32% for the three months ended December 31, 2022 as compared to the prior year period of 29%.


	December 31,
	2022				2021				Increase
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
TS	$	4,164	26	%	$	2,992	26	%	$	1,172	—	%
HPP		1,653	66	%		622	58	%		1,031	8	%
Total	$	5,817	32	%	$	3,614	29	%	$	2,203	3	%

The impact of product mix within our TS segment on gross margin for the three months ended December 31, 2022 and 2021 was as follows:


	December 31,
	2022				2021				Increase
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
Products	$	2,029	17	%	$	1,144	14	%	$	885	3	%
Services		2,135	56	%		1,848	56	%		287	—	%
Total	$	4,164	26	%	$	2,992	26	%	$	1,172	—	%

The overall TS segment GM as a percentage of sales remained flat at 26% for the three month period ended December 31, 2022 compared to the prior year period. This was primarily due to prior year’s services GM being a larger percentage of total GM relative to product GM, which was offset in the current year by improved product GM as a percentage of product sales. Product GM as a percentage of product sales increased to 17% for the three months ended December 31, 2022 from 14% for the prior year period. This was primarily due to higher margin products being sold to several major customers. Service GM as a percentage of service sales remained flat at 56% for the three months ended December 31, 2022 compared to the prior year period due to no significant changes in any types of service revenue margin as a percentage of its respective revenue.

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The impact of product mix within our HPP segment on gross margin for the three months ended December 31, 2022 and 2021 was as follows:


	December 31,
	2022				2021				Increase (decrease)
	GM$		GM%		GM$		GM%		GM$		GM%

	(Dollar amounts in thousands)
Products	$	1,421	66	%	$	299	42	%	$	1,122	24	%
Services		232	71	%		323	94	%		(91)	(23)	%
Total	$	1,653	66	%	$	622	58	%	$	1,031	8	%

The overall HPP segment GM as a percentage of sales increased to 66% for the three months ended December 31, 2022 from 58% for the three months ended December 31, 2021. The 24% increase in product GM as a percentage of product revenue for the three months ended December 31, 2022 compared to the same prior year period is primarily due to one major order that did not occur in the prior year period. The 23% decrease in service GM as a percentage of services revenue from prior year was due to decreased royalty sales, which are nearly all margin.

Engineering and Development Expenses

The engineering and development expenses incurred by our HPP segment increased $0.2 million for the three months ended December 31, 2022 to $0.8 million when compared to the prior year period due to increased consulting expenses. The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA Zero Trust Gateway cyber security products.

Selling, General and Administrative Expenses

The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended December 31, 2022 and 2021:


	Three months ended December 31,									$	%
			% of				% of			Increase	Increase
	2022		Total		2021		Total			(Decrease)	(Decrease)

	(Dollar amounts in thousands)
By Operating Segment:
TS segment	$	2,703	75	%	$	2,383	70	%	$	320	13	%
HPP segment		914	25	%		1,000	30	%		(86)	(9)	%
Total	$	3,617	100	%	$	3,383	100	%	$	234	7	%

SG&A expenses of $3.6 million for the three months ended December 31, 2022 increased $0.2 million as compared to the prior year period. The TS segment G&A expenses increased by approximately $0.3 million due to increased variable compensation as there were higher sales in the first quarter of fiscal year 2023 when compared to the prior year period. The HPP segment SG&A expenses decreased approximately $0.1 million for the three months ended December 31, 2022 as compared to the prior year period due to decreased labor expenses and consulting.

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Other Income/Expenses

The following table details other income (expense) for the three months ended December 31, 2022 and 2021:


	Three months ended
					Increase
	December 31, 2022		December 31, 2021		(Decrease)

	(Amounts in thousands)
Foreign exchange loss	$	(501)	$	(17)	$	(484)
Interest expense		(64)		(105)		41
Interest income		261		145		116
Other income (expense), net		34		19		15
Total other income (expense), net	$	(270)	$	42	$	(312)

The $0.3 million decrease in total other income (expense), net for the three months ended December 31, 2022 as compared to the prior year period is primarily due to a net increase in foreign exchange loss of $0.5 million, partially offset by an increase in interest income of $0.1 million.

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 gain is primarily from a Euro and U.S. Dollar bank account. The US dollar weakened relative to the British Pound for the three months ended December 31, 2022 causing a foreign exchange loss, partially offset with the Euro strengthening relative to the British Pound for the same period.

The interest income increase of $116 thousand for the three months ended December 31, 2022 as compared to the prior year period is primarily due to new 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) entered into subsequent to the first quarter of fiscal year 2022 in the TS-US division combined with higher interest income from our cash and cash equivalents due to increased interest rates in the first quarter of fiscal year 2023. This was partially offset by less interest income from agreements that have payments in excess of one year that were entered into in the first quarter of fiscal year 2022 or prior due to more principal payments resulting in the receivables accruing less interest income.

The interest expense decrease of $41 thousand for the three months ended December 31, 2022 as compared to the prior year period is related to the TS U.S. division entering into multi-year contracts in prior years, which incur less interest expense as time elapses due to principal payments being made. Payments on these agreements contain both principal and interest expense. See Note 10 in Item 1 to this Quarterly Report on Form 10-Q for details.

Income Taxes

An income tax expense of $133 thousand was recorded for the three months ended December 31, 2022 compared to an income tax expense of $12 thousand in the same period of fiscal year 2022. The income tax expense for three months ended December 31, 2022 is primarily driven by minimum state tax expenses and the required capitalization of R&D expenses under IRC Section 174, offset by the use of federal NOL and R&D credits. The Company continues to maintain a full valuation allowance on its operations but will continue to evaluate this need going forward. The income tax expense for the three months ended December 31, 2021 was 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 (PPP).

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Liquidity and Capital Resources

Our primary source of liquidity is our cash and cash equivalents, which decreased by $4.4 million to $19.6 million as of December 31, 2022 from $24.0 million as of September 30, 2022.

Our significant sources of cash for the three months ended December 31, 2022 included a decrease in accounts receivable and long-term receivable of $1.2 million, an increase of $0.3 million in net amount received under the line-of-credit agreement, a decrease in other assets of $0.3 million, and a decrease in inventories of $0.2 million.

Our significant uses of cash for the three months ended December 31, 2022 were primarily related to a decrease in accounts payable and accrued expenses and other long-term liabilities of $7.4 million and repayments on notes payable of $0.4 million.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $5.0 million as of December 31, 2022 and consisted of 0.4 million Euros, 0.2 million British Pounds, and 4.4 million U.S. Dollars. This cash is included in our total cash and cash equivalents reported within our financial statements. Approximately 3.5 million U.S. Dollars was transferred from the foreign subsidiary in the U.K. to Modcomp, Inc. (TS-US) to use in operations during the first quarter of fiscal year 2023.

As of December 31, 2022 and September 30, 2022, 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 $11.5 million and $11.9 million were available as of December 31, 2022 and September 30, 2022, respectively. As of December 31, 2022 and September 30, 2022 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.”

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

Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash generated from operations, and availability on our line of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least 12 months from the date of this filing.

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 December 31, 2022. 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 December 31, 2022, the

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Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the three months ended December 31, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2022.

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*		The following financial statements for the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022 formatted in eXtensible Business Reporting Language (XBRL) (a) our Condensed Consolidated Balance Sheets as of December 31, 2022 and September 30, 2022, (b) our Condensed Consolidated Statements of Income (Loss) for the three months ended December 31, 2022 and 2021, (c) our Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 31, 2022 and 2021, (d) our Condensed Consolidated Statement of Shareholders’ Equity for the three months ended December 31, 2022 and 2021, (e) our Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2022 and 2021 and (f) the Notes to such Condensed Consolidated Financial Statements.
104*		The cover page from this Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, formatted in inline XBRL.

* Filed Herewith

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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.

February 9, 2023	By:	/s/ Victor Dellovo
		Victor Dellovo
		Chief Executive Officer,
		President and Director

February 9, 2023	By:	/s/ Gary W. Levine
		Gary W. Levine
		Chief Financial Officer

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CSP (CSPI) 10-Q2023 Q1 Quarterly report

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