CSP INC /MA/ [CSPI] Filings

10-Q 1 cspi-20230630x10q.htm 10-Q

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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, 2023

◻ 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 3, 2023, the registrant had 4,727,573 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 (unaudited) as of June 30, 2023 and September 30, 2022	3

	Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2023 and 2022 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2023 and 2022 (unaudited)	5

	Condensed Consolidated Statement of Shareholders’ Equity for the three and nine months ended June 30, 2023 and 2022 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2023 and 2022 (unaudited)	8

	Notes to Condensed 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	36

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	36

Item 2.	Purchases of equity securities	37

Item 6.	Exhibits	37

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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)


	June 30,		September 30,
	2023		2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,848	$	23,982
Investments - held-to-maturity		2,351		—
Accounts receivable, net of allowances of $106 and $88		23,523		22,993
Investment in lease, net-current portion		11		17
Inventories		4,182		4,372
Refundable income taxes		144		1,050
Other current assets		4,450		7,043
Total current assets		48,509		59,457


Property, equipment and improvements, net		603		647
Operating lease right-of-use assets		1,101		1,160
Intangibles, net		50		10
Investment in lease, net-less current portion		8		3
Long-term receivable		8,361		7,412
Deferred income taxes		2,053		—
Cash surrender value of life insurance		5,323		5,163
Pension benefits assets		1,483		1,099
Other assets		112		111
Total assets	$	67,603	$	75,062

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	13,924	$	22,463
Line of credit		1,308		3,124
Notes payable - current portion		443		427
Deferred revenue		3,496		4,058
Pension and retirement plans		110		110
Total current liabilities		19,281		30,182
Pension and retirement plans		1,210		1,337
Notes payable - noncurrent portion		—		449
Operating lease liabilities - noncurrent portion		600		623
Income taxes payable		462		462
Other noncurrent liabilities		1,823		3,046
Total liabilities		23,376		36,099

Shareholders’ equity:
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,710 and 4,554 shares, respectively		48		46
Additional paid-in capital		20,406		19,476
Retained earnings		30,093		26,769
Accumulated other comprehensive loss		(6,320)		(7,328)
Total shareholders’ equity		44,227		38,963
Total liabilities and shareholders’ equity	$	67,603	$	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				Nine Months Ended
	June 30,		June 30,		June 30,		June 30,
	2023		2022		2023		2022
Sales:
Product	$	12,934	$	8,438	$	36,143	$	25,375
Services		4,774		4,888		13,178		12,301
Total sales		17,708		13,326		49,321		37,676

Cost of sales:
Product		9,960		6,548		27,311		20,090
Services		1,821		1,804		5,276		4,798
Total cost of sales		11,781		8,352		32,587		24,888

Gross profit		5,927		4,974		16,734		12,788

Operating expenses:
Engineering and development		741		884		2,435		2,228
Selling, general and administrative		4,611		4,071		12,123		10,961
Total operating expenses		5,352		4,955		14,558		13,189

Operating income (loss)		575		19		2,176		(401)

Other income (expense):
Foreign exchange (loss) gain		(93)		618		(709)		777
Interest expense		(82)		(80)		(208)		(286)
Interest income		401		158		987		429
Other income (expense), net		21		(20)		62		(17)
Total other income (expense), net		247		676		132		903
Income before income taxes		822		695		2,308		502
Income tax (benefit) expense		(1,692)		11		(1,488)		28
Net income	$	2,514	$	684	$	3,796	$	474
Net income attributable to common shareholders	$	2,355	$	646	$	3,564	$	450

Net income per common share - basic	$	0.53	$	0.15	$	0.82	$	0.11
Weighted average common shares outstanding – basic		4,413		4,280		4,366		4,251

Net income per common share - diluted	$	0.52	$	0.15	$	0.80	$	0.11
Weighted average common shares outstanding – diluted		4,516		4,283		4,435		4,265

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				Nine Months Ended
	June 30,		June 30,		June 30,		June 30,
	2023		2022		2023		2022
Net income	$	2,514	$	684	$	3,796	$	474
Foreign currency translation gain (loss) adjustments, net		166		(558)		1,008		(710)
Total comprehensive income (loss)	$	2,680	$	126	$	4,804	$	(236)

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 June 30, 2023 and 2022:

(Amounts in thousands, except per share data)

(Unaudited)




								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
Three Months Ended June 30, 2023:	Shares	Amount		Capital		Earnings		loss		Equity
Balance as of March 31, 2023	4,711	$	48	$	20,113	$	27,773	$	(6,486)	$	41,448
Net income	—		—		—		2,514		—		2,514
Other comprehensive income	—		—		—		—		166		166
Stock-based compensation	—		—		293		—		—		293
Purchase of common stock	(1)		—		—		(6)		—		(6)
Cash dividends paid on common stock ($0.04 per share)	—		—		—		(188)		—		(188)
Balance as of June 30, 2023	4,710	$	48	$	20,406	$	30,093	$	(6,320)	$	44,227

								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
Three Months Ended June 30, 2022:	Shares	Amount		Capital		Earnings		loss		Equity
Balance as of March 31, 2022	4,533	$	46	$	18,820	$	24,881	$	(9,600)	$	34,147
Net income	—		—		—		684		—		684
Other comprehensive loss	—		—		—		—		(558)		(558)
Stock-based compensation	—		—		254		—		—		254
Restricted stock cancellation	(1)		—		—		—		—		—
Restricted stock issuance	10		—		—		—		—		—
Purchase of common stock	(6)		—		—		(51)		—		(51)
Balance as of June 30, 2022	4,536	$	46	$	19,074	$	25,514	$	(10,158)	$	34,476

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 nine months ended June 30, 2023 and 2022:

(Amounts in thousands, except per share data)

(Unaudited)


								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
Nine months ended June 30, 2023:	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	—		—		—		3,796		—		3,796
Other comprehensive income	—		—		—		—		1,008		1,008
Stock-based compensation	—		—		832		—		—		832
Restricted stock issuance	143		2		—		—		—		2
Issuance of shares under employee stock purchase plan	14		—		98		—		—		98
Purchase of common stock	(1)		—		—		(6)		—		(6)
Cash dividends paid on common stock ($0.10 per share)	—		—		—		(466)		—		(466)
Balance as of June 30, 2023	4,710	$	48	$	20,406	$	30,093	$	(6,320)	$	44,227

								Accumulated
				Additional				other		Total
				Paid-in		Retained		comprehensive		Shareholders’
Nine months ended June 30, 2022:	Shares	Amount		Capital		Earnings		loss		Equity
Balance as of September 30, 2021	4,394	$	45	$	18,258	$	25,191	$	(9,448)	$	34,046
Net income	—		—		—		474		—		474
Other comprehensive loss	—		—		—		—		(710)		(710)
Stock-based compensation	—		—		726		—		—		726
Restricted stock cancellation	(1)		(1)		—		—		—		(1)
Restricted stock issuance	151		2		—		—		—		2
Issuance of shares under employee stock purchase plan	11		—		90		—		—		90
Purchase of common stock	(19)		—		—		(151)		—		(151)
Balance as of June 30, 2022	4,536	$	46	$	19,074	$	25,514	$	(10,158)	$	34,476

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)


	Nine Months Ended
	June 30,		June 30,
	2023		2022
Operating activities
Net income	$	3,796	$	474

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		258		250
Amortization of intangibles		11		9
Loss on sale of fixed assets, net		—		15
Foreign exchange loss (gain)		709		(777)
Provision for losses (recoveries) on accounts receivable		34		(27)
Provision for obsolete inventory		103		17
Amortization of lease right-of-use assets		451		478
Stock-based compensation expense on stock options and restricted stock awards		832		726
Deferred income taxes		(2,053)		—
Decrease in cash surrender value of life insurance		(96)		(1,189)

Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(569)		50
Decrease (increase) in inventories		89		(1,643)
Decrease in refundable income taxes		906		530
Increase in operating lease right-of-use assets		(393)		(63)
Decrease (increase) in other assets		2,609		(860)
Decrease in investment in lease		1		50
(Increase) decrease in long-term receivable		(950)		2,178
Decrease in accounts payable and accrued expenses		(8,393)		(322)
Decrease in interest payable		(94)		(71)
Decrease in operating lease liabilities		(67)		(420)
(Decrease) increase in deferred revenue		(561)		2,775
Decrease in pension and retirement plans liabilities		(350)		(226)
Decrease in other long-term liabilities		(1,221)		(1,734)
Net cash (used in) provided by operating activities		(4,948)		220

Investing activities
Life insurance premiums paid		(64)		(70)
Purchase of held-to-maturity investments		(3,533)		—
Proceeds from maturities of held-to-maturity investments		1,182		—
Proceeds from corporate life insurance owned policy		—		322
Proceeds from sales of property, equipment, and improvements		—		2
Additions of intangible assets		(51)		—
Purchases of property, equipment and improvements		(215)		(223)
Net cash (used in) provided by investing activities		(2,681)		31

Financing activities
Dividends paid		(466)		—
Net borrowing under line-of-credit agreement		(1,816)		2,058
Repayments on notes payable		(406)		(647)
Principal payments on finance leases		(4)		(35)
Purchase of common stock		(6)		(151)
Proceeds from issuance of shares under equity compensation plans		98		90
Net cash (used in) provided by financing activities		(2,600)		1,315
Effects of exchange rate on cash, net		95		(158)
Net (decrease) increase in cash and cash equivalents		(10,134)		1,408
Cash and cash equivalents beginning of year		23,982		20,007
Cash and cash equivalents end of year	$	13,848	$	21,415

Supplementary cash flow information:
Cash paid (received) for income taxes	$	42	$	(233)
Cash paid for interest	$	308	$	184

Supplementary non-cash financing activities:
Obtaining a right-of-use asset in exchange for a lease liability	$	392	$	23
Customer financing for inventory sold (see Note 6 Accounts and Long-Term Receivable for details)	$	5,436	$	1,232

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 AND NINE MONTHS ENDED JUNE 30, 2023

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 and New Significant Accounting Policy

Basis of Presentation

The accompanying interim condensed 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 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.

New Significant Accounting Policy – Held-to-maturity investment securities

Our investment securities are classified as held-to-maturity investments and consists of treasury bills, which mature at different intervals with the last maturity date in August of 2023. These investments are stated at amortized cost. The carrying value of these investments as of June 30, 2023 was $2.4 million and we did not have any outstanding investments as of September 30, 2022. We did not record any gains or losses on these securities during the nine months ended June 30, 2023. The estimated fair value of these investments approximated their carrying values of June 30, 2023. We do not intend to sell these investments.

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 June 30, 2023

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 (if any), 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.

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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 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 the 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. 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 June 30,	Segment		Kingdom		U.S.		Total		Total

	(Amounts in thousands)
2023
Sales:
Product	$	996	$	141	$	11,797	$	11,938	$	12,934
Service		339		65		4,370		4,435		4,774
Total sales	$	1,335	$	206	$	16,167	$	16,373	$	17,708

			Technology Solutions Segment
	High