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EX-32.1 - EX-32.1 - CSP INC /MA/cspi-20200630ex32110103a.htm
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EX-31.1 - EX-31.1 - CSP INC /MA/cspi-20200630ex311c10bdb.htm

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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

For the Quarterly Period Ended           June 30, 2020

or

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

For the transition period from              to             .

Commission File Number 0-10843


CSP Inc.

(Exact name of Registrant as specified in its charter)


Massachusetts

04-2441294

(State or other jurisdiction of incorporation or organization)

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

175 Cabot Street - Suite 210, Lowell, MA

01854

(Address of principle executive offices)

(Zip Code)

(978)-954-5038

(Registrant’s telephone number, including area code)


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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

Title of Each Class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CSPI

Nasdaq Global Market

As of August 6, 2020, the registrant had 4,276,814 shares of common stock issued and outstanding.


INDEX

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets (unaudited) as of June 30, 2020 and September 30, 2019

3

Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2020 and 2019

4

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended June 30, 2020 and 2019

5

Consolidated Statement of Shareholders’ Equity (unaudited) for the three and nine months ended June 30, 2020 and 2019

6

Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2020 and 2019

8

Notes to Consolidated Financial Statements (unaudited)

9

Item 2.

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

27

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

38

Item 2.

Purchases of Equity Securities

38

Item 6.

Exhibits

39


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

June 30, 

September 30, 

    

2020

    

2019

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

19,976

$

18,099

Accounts receivable, net of allowances of $191 and $138

 

10,856

 

15,114

Investment in lease, net-current portion

 

416

 

367

Inventories

 

6,412

 

7,818

Refundable income taxes

 

647

 

487

Other current assets

 

3,226

 

4,649

Total current assets

 

41,533

 

46,534

Property, equipment and improvements, net

 

1,205

 

1,273

Operating lease right-of-use assets

2,180

Intangibles, net

 

30

 

37

Investment in lease, net-less current portion

 

103

 

417

Long-term receivable

5,146

 

5,328

Deferred income taxes

 

 

1,946

Cash surrender value of life insurance

 

3,916

 

3,718

Other assets

 

148

 

116

Total assets

$

54,261

$

59,369

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

9,721

$

16,175

Line of credit

1,113

2,459

Notes payable - current portion

1,679

317

Deferred revenue

 

1,267

 

741

Pension and retirement plans

 

336

 

335

Total current liabilities

 

14,116

 

20,027

Pension and retirement plans

 

6,941

 

6,904

Notes payable - noncurrent portion

2,919

684

Operating lease liabilities - noncurrent portion

1,562

Income taxes payable

 

 

694

Other noncurrent liabilities

 

254

 

632

Total liabilities

 

25,792

 

28,941

Shareholders’ equity:

 

  

 

  

Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,253 and 4,154 shares, respectively

 

43

 

42

Additional paid-in capital

 

16,562

 

15,733

Retained earnings

 

24,455

 

27,246

Accumulated other comprehensive loss

 

(12,591)

 

(12,593)

Total shareholders’ equity

 

28,469

 

30,428

Total liabilities and shareholders’ equity

$

54,261

$

59,369

See accompanying notes to unaudited consolidated financial statements.

3


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except for per share data)

For the three months ended

For the nine months ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Sales:

 

  

 

  

  

 

  

 

Product

$

10,294

$

18,076

$

35,812

$

47,390

Services

 

3,238

 

3,494

 

10,387

 

9,510

Total sales

 

13,532

 

21,570

 

46,199

 

56,900

Cost of sales:

 

  

 

  

 

  

 

  

Product

 

8,361

 

15,407

 

29,924

 

39,990

Services

 

947

 

1,324

 

3,537

 

3,976

Total cost of sales

 

9,308

 

16,731

 

33,461

 

43,966

Gross profit

 

4,224

 

4,839

 

12,738

 

12,934

Operating expenses:

 

  

 

  

 

  

 

  

Engineering and development

 

693

 

583

 

2,081

 

2,109

Selling, general and administrative

 

3,924

 

4,111

 

11,595

 

11,436

Total operating expenses

 

4,617

 

4,694

 

13,676

 

13,545

Operating income (loss)

 

(393)

 

145

 

(938)

 

(611)

Other income (expense):

 

  

 

  

 

  

 

  

Foreign exchange gain (loss)

 

113

 

8

 

257

 

(22)

Interest expense

 

(56)

 

(26)

 

(168)

 

(74)

Interest income

 

133

 

79

 

469

 

200

Other income, (expense) net

 

3

 

 

7

 

4

Total other income (expense)

 

193

 

61

 

565

 

108

Income (loss) before income taxes

(200)

 

206

(373)

 

(503)

Income tax expense (benefit)

10

 

(326)

1,109

 

(466)

Net income (loss)

$

(210)

$

532

$

(1,482)

$

(37)

Net income (loss) attributable to common stockholders

$

(210)

$

509

$

(1,482)

$

(37)

Net income (loss) per share – basic

$

(0.05)

$

0.13

$

(0.37)

$

(0.01)

Weighted average shares outstanding – basic

 

4,048

 

4,051

 

4,015

 

3,913

Net income (loss) per share – diluted

$

(0.05)

$

0.12

$

(0.37)

$

(0.01)

Weighted average shares outstanding – diluted

 

4,048

 

4,142

 

4,015

 

3,913

See accompanying notes to unaudited consolidated financial statements.

4


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

For the three months ended

For the nine months ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Net income (loss)

$

(210)

 

$

532

$

(1,482)

 

$

(37)

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Foreign currency translation gain (loss) adjustments

 

(22)

 

(220)

 

2

 

(218)

Other comprehensive gain (loss)

 

(22)

 

(220)

 

2

 

(218)

Total comprehensive income (loss)

$

(232)

 

$

312

$

(1,480)

 

$

(255)

See accompanying notes to unaudited consolidated financial statements.

5


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three and nine months ended June 30, 2020 and 2019:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended June 30, 2020:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of March 31, 2020

 

4,254

$

43

$

16,300

$

24,668

$

(12,569)

$

28,442

Net loss

 

 

 

 

(210)

 

 

(210)

Other comprehensive loss

 

 

 

 

 

(22)

 

(22)

Stock-based compensation

 

 

 

262

 

 

 

262

Purchase of common stock

 

(1)

 

 

 

(3)

 

 

(3)

Balance as of June 30, 2020

 

4,253

$

43

$

16,562

$

24,455

$

(12,591)

$

28,469

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended June 30, 2019:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of March 31, 2019

 

4,137

$

42

$

15,165

$

28,291

$

(10,823)

$

32,675

Net income

 

 

 

 

532

 

 

532

Other comprehensive loss

 

 

 

 

 

(220)

 

(220)

Stock-based compensation

 

 

 

202

 

 

 

202

Restricted stock cancellation

 

(3)

 

 

 

 

 

Restricted stock issuance

 

2

 

 

 

 

 

Cash dividends paid on common stock ($0.15 per share)

 

 

 

 

(620)

 

 

(620)

Balance as of June 30, 2019

 

4,136

$

42

$

15,367

$

28,203

$

(11,043)

$

32,569

See accompanying notes to unaudited consolidated financial statements.

6


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three and nine months ended June 30, 2020 and 2019:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the nine months ended June 30, 2020:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of September 30, 2019

 

4,154

$

42

$

15,733

$

27,246

$

(12,593)

$

30,428

Net loss

 

 

 

 

(1,482)

 

 

(1,482)

Other comprehensive gain

 

 

 

 

 

2

 

2

Exercise of stock options

 

 

 

2

 

 

 

2

Stock-based compensation

 

 

 

717

 

 

 

717

Restricted stock issuance

 

97

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

9

 

 

110

 

 

 

110

Purchase of common stock

(7)

(46)

(46)

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

 

 

 

 

(1,263)

 

 

(1,263)

Balance as of June 30, 2020

 

4,253

$

43

$

16,562

$

24,455

$

(12,591)

$

28,469

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the nine months ended June 30, 2019:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of September 30, 2018

 

4,017

$

40

$

14,661

$

29,926

$

(10,825)

$

33,802

Adoption of ASU 2014-09*

158

158

Net loss

 

 

 

 

(37)

 

 

(37)

Other comprehensive loss

 

 

 

 

 

(218)

 

(218)

Exercise of stock options

 

1

 

1

 

3

 

 

 

4

Stock-based compensation

 

 

 

586

 

 

 

586

Restricted stock cancellation

(3)

Restricted stock issuance

 

108

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

13

 

 

117

 

 

 

117

Cash dividends paid on common stock ($0.45 per share)

 

 

 

 

(1,844)

 

 

(1,844)

Balance as of June 30, 2019

 

4,136

$

42

$

15,367

$

28,203

$

(11,043)

$

32,569


* As of October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the nine months ended

June 30, 

June 30, 

    

2020

    

2019

Operating activities

 

  

 

  

Net loss

$

(1,482)

$

(37)

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

 

  

 

  

Depreciation

 

345

 

300

Amortization of intangibles

 

7

 

9

Loss on sale of fixed assets, net

9

Foreign exchange (gain) loss

 

(257)

 

22

Non-cash changes in accounts receivable

 

53

 

17

Non-cash changes in inventories

 

342

 

368

Non-cash lease expense

486

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

 

717

 

588

Deferred income taxes

 

1,946

 

(135)

Increase in cash surrender value of life insurance

 

(21)

 

(103)

Changes in operating assets and liabilities:

 

  

 

  

Decrease (increase) in accounts receivable

 

4,228

 

(3,576)

Decrease in life insurance receivable

 

 

256

Decrease (increase) in inventories

 

1,064

 

(2,683)

Increase in refundable income taxes

 

(160)

 

(377)

Increase in operating right-of-use assets

(2,666)

Decrease (increase) in other assets

1,360

(2,153)

Decrease in investment in lease

 

265

 

113

Decrease (increase) in long-term receivable

182

(956)

(Decrease) increase in accounts payable and accrued expenses

 

(6,911)

 

4,300

Increase in operating lease liabilities

2,240

Increase (decrease) in deferred revenue

 

525

 

(195)

Increase (decrease) in pension and retirement plans liabilities

 

26

 

(552)

Decrease in income taxes payable

 

(694)

 

(13)

(Decrease) increase in other long-term liabilities

 

(379)

 

242

Net cash provided by (used in) operating activities

 

1,225

 

(4,565)

Investing activities

 

  

 

  

Life insurance premiums paid

 

(144)

 

(144)

Purchases of property, equipment and improvements

 

(285)

 

(590)

Net cash used in investing activities

 

(429)

 

(734)

Financing activities

 

  

 

  

Dividends paid

 

(1,263)

 

(1,844)

Net payments under line-of-credit agreement

(1,346)

(773)

Proceeds from debt

4,219

Repayments on debt

(623)

Principal payments on finance leases

 

(248)

 

(206)

Purchase of common stock

(46)

Proceeds from issuance of shares under equity compensation plans

 

112

 

120

Net cash provided by (used in) financing activities

 

805

 

(2,703)

Effects of exchange rate on cash

 

276

 

(312)

Net increase (decrease) in cash and cash equivalents

 

1,877

 

(8,314)

Cash and cash equivalents beginning of period

18,099

 

25,107

Cash and cash equivalents at end of period

$

19,976

$

16,793

Supplementary cash flow information:

 

  

 

  

Cash paid for income taxes

$

16

$

47

Cash paid for interest

$

189

$

68

Supplementary non-cash financing and investing activities:

Obtaining a right-of-use asset in exchange for a lease liability

$

216

$

Non-cash purchases of property and equipment

$

$

15

See accompanying notes to unaudited consolidated financial statements.

8


CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2020 AND 2019

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

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited consolidated financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

2.            Use of Estimates

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

3.            Recent Accounting Pronouncements

Accounting standards adopted in fiscal year 2020

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), an amendment of the FASB Accounting Standards Codification. This ASU requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements, which excludes leases that meet the definition of a short-term lease. The Company adopted this standard on October 1, 2019 using a modified retrospective transition method with an adjustment to the assets and liabilities on the Consolidated Balance Sheet with no adjustment to any prior period. Additionally, prior comparative periods were not restated. A package of three practical expedients that is applicable to all leases as lessee or lessor was adopted. This includes not reassessing whether any expired or existing contracts contain leases, not reassessing lease classification for any expired or existing leases, and not reassessing initial direct cost for any existing lease under ASC Topic 840. The Company also elected the practical expedient as a lessee to not separate lease and non-lease components for operating leases. The statement of operations for three and nine months ended June 30, 2020 was not materially affected. However, there was a material impact on the Company’s consolidated balance sheet as of June 30, 2020 due to the recognition of right-of-use assets and lease liabilities for operating leases, which is shown in the following table:

9


As reported

ASC 842

As of

    

September 30, 2019

    

Adjustment

    

October 1, 2019

(In thousands)

Assets:

Operating lease right-of-use assets

$

$

2,448

$

2,448

Liabilities:

Accounts payable and accrued expenses

16,175

665

16,840

Operating lease liabilities - noncurrent portion

1,783

1,783

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Beginning October 1, 2019, the Company adopted the ASU and it did not have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, an amendment of the FASB Accounting Standards Codification. Under this ASU companies will no longer be required to value non-employee awards differently from employee awards, but the accounting remains different for attribution and a contractual term election for valuing nonemployee equity share options. Equity-classified awards to nonemployees will now be measured at the grant date using fair value of the equity instruments the company is obligated to issue and recognition is associated with the probable outcome. Awards are subsequently measured using stock compensation guidance unless they are modified after the nonemployee stops providing goods or services. Existing disclosure requirements within the stock compensation guidance also apply to nonemployee awards. For public entities, the new standard is effective for annual periods beginning after December 15, 2018, including interim periods within that fiscal year. Beginning October 1, 2019, the Company adopted the ASU and it did not have a material impact on our consolidated financial statements.

New accounting standards not adopted as of June 30, 2020

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, the new standard is effective for annual periods beginning after December 15, 2019, 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.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, an amendment of the FASB Accounting Standards Codification. Under this ASU existing disclosures not considered cost beneficial are removed, disclosures identified as relevant are added, and there is added clarification regarding specific existing disclosures. For public entities, the new standard is effective for annual periods beginning after December 15, 2020. The Company is evaluating the effect that ASU 2018-14 will have on its consolidated financial statements and related disclosures.

10


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.

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

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 evenly over the period of the warranty. Multicomputer repair services revenue is recognized upon control transfer when the customer takes possession of the computer at time of shipping. Revenue generated from maintenance services is recognized evenly over the term of the contract.

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

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

TS Segment Revenue

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

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

11


HPP Segment Revenue

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

See disaggregated revenues below by products/services and geography.

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended June 30, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

780

$

75

$

9,420

$

9,495

$

10,275

Service

803

132

2,303

2,435

3,238

Finance *

19

19

19

Total sales

$

1,583

$

207

$

11,742

$

11,949

$

13,532

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended June 30, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2019

Sales:

Product

$

1,592

$

720

$

15,731

$

16,451

$

18,043

Service

548

109

2,837

2,946

3,494

Finance *

33

33

33

Total sales

$

2,140

$

829

$

18,601

$

19,430

$

21,570

12


Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the nine months ended June 30, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

2,469

$

812

$

32,463

$

33,275

$

35,744

Service

1,630

342

8,415

8,757

10,387

Finance *

68

68

68

Total sales

$

4,099

$

1,154

$

40,946

$

42,100

$

46,199

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the nine months ended June 30, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2019

Sales:

Product

$

4,700

$

4,340

$

38,244

$

42,584

$

47,284

Service

1,080

274

8,156

8,430

9,510

Finance *

106

106

106

Total sales

$

5,780

$

4,614

$

46,506

$

51,120

$

56,900


*     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 the Company’s performance toward satisfying a performance obligation are used for progress. An estimate for professional services is made at the beginning of each contract based on prior experience and monitored throughout the services. This method is most appropriate as it depicts the measure of progress towards satisfaction of the performance obligation.

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

Contract Assets and Liabilities

When the Company has performed work but does not have an unconditional right to payment, a contract asset is recorded. When the Company has the right to bill a customer, accounts receivable is recorded as an unconditional right exists. Current contract assets were $1.6 million and $0.6 million as of June 30, 2020 and September 30, 2019, respectively. The current portion is recorded in other current assets on the consolidated balance sheets.  There were no non-current contract assets as of June 30, 2020 and September 30, 2019. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before the Company transfers a good or service to the customer. Current contract liabilities were $1.3 million and $0.7 million as of June 30, 2020 and September 30, 2019, respectively. The current portion of contract liabilities is recorded in deferred revenue on the consolidated balance sheets.

13


The long-term portion of contract liabilities were $0.2 million and $0.3 million as of June 30, 2020 and September 30, 2019, respectively. These non-current liabilities are recorded in other noncurrent liabilities. Revenue recognized for the three and nine months ended June 30, 2020 that was included in contract liabilities as of the beginning of the period was $0.1 million and $0.4 million, respectively.

Contract Costs

Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are less than a one-year period, are expensed as incurred, utilizing the practical expedient in ASC 340-40-25-4. For a period greater than one year, incremental contract costs are capitalized if the Company expects to recover these costs. The costs are amortized over the contract term and expected renewal periods. The period of amortization is generally three to six years. Incremental costs are related to commissions in the TS portion of the business. Current capitalized contract costs are within the other current assets on the consolidated balance sheets as of June 30, 2020 and September 30, 2019. The portion of current capitalized costs were $82 thousand and $85 thousand as of June 30, 2020 and September 30, 2019, respectively. There are no non-current capitalized costs on the consolidated balance sheets as these commissions are paid annually even when the contract extends beyond a one-year period. The amount of incremental costs amortized for the three and nine months ended June 30, 2020 were $81 thousand and $243 thousand, respectively. The amount of incremental costs amortized for the three and nine months ended June 30, 2019 were $66 thousand and $174 thousand, respectively. This is recorded in selling, general, and administrative expenses. There was no impairment related to incremental costs capitalized during the three and nine months ended June 30, 2020.

Costs to fulfill a contract are capitalized when the costs are related to a contract or anticipated contract, generate or enhance resources that will be used in satisfying performance obligations in the future, and costs are recoverable. Costs to fulfill a contract are related to the TS portion of the business and involve activities performed before managed services can be completed. Current capitalized fulfillment costs are in the other current assets and noncurrent costs are in other assets on the consolidated balance sheets. The portion of current capitalized costs were $13 thousand and $47 thousand as of June 30, 2020 and September 30, 2019, respectively. The portion of noncurrent capitalized costs were $25 thousand as of June 30, 2020 and there were not any as of September 30, 2019. The amount of fulfillment costs amortized for three and nine months ended June 30, 2020 were $3 thousand and $9 thousand, respectively. The amount of fulfillment costs amortized for three and nine months ended June 30, 2019 were $1 thousand and $9 thousand, respectively, and recorded in cost of sales. There was no impairment related to fulfillment costs capitalized.

Other

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

14


The Company has certain contracts that have an original term of more than one year. The royalty agreement is longer than one year, but not included in the table below as the royalties are sales-based. Managed service contracts are generally longer than one year. For these contracts the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2020 is set forth in the table below:

    

(Amounts in thousands)

Fiscal 2020 (remaining 3 months)

$

387

Fiscal 2021

1,319

Fiscal 2022

582

Fiscal 2023

191

Fiscal 2024

30

$

2,509

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, or EPS, utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.

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

For the three months ended

For the nine months ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

(Amounts in thousands except per share data)

Net income (loss)

 

$

(210)

  

$

532

 

(1,482)

  

(37)

 

Less: net income attributable to nonvested common stock

 

  

23

 

  

 

Net income (loss) attributable to common stockholders

$

(210)

  

$

509

$

(1,482)

  

$

(37)

Weighted average total shares outstanding – basic

 

4,048

  

 

4,244

 

4,015

  

 

3,913

Less: weighted average non–vested shares outstanding

 

  

 

193

 

  

 

Weighted average number of common shares outstanding – basic

 

4,048

  

 

4,051

 

4,015

  

 

3,913

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

 

  

 

91

 

  

 

Weighted average common shares outstanding – diluted

 

4,048

  

 

4,142

 

4,015

  

 

3,913

Net income (loss) per share – basic

$

(0.05)

  

$

0.13

$

(0.37)

  

$

(0.01)

Net income (loss) per share – diluted

$

(0.05)

  

$

0.12

$

(0.37)

  

$

(0.01)

Non-vested restricted stock awards of 205,000 and 200,000 shares were excluded from the diluted loss per share calculation for the three and nine months ended June 30, 2020, respectively. Non-vested restricted stock awards of 176,000 shares were excluded from the diluted loss per share calculation for the nine months ended June 30, 2019. These awards were excluded because there was a net loss for these periods and their inclusion would have been anti-dilutive.

15


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 for financing through leases. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $2.3 million and $5.0 million as of June 30, 2020. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $2.1 million and $5.0 million as of September 30, 2019, respectively. The receivables with a payment term exceeding one year carry an average weighted interest rate of 6.5%, 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 June 30, 2020 or September 30, 2019. There was no activity in the allowance for credit losses of these receivables for the nine months ended June 30, 2020 and June 30, 2019, 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 and nine months ended June 30, 2020 was $120 thousand and $349 thousand, respectively. The amount of interest income earned from this type of agreement for the three and nine months ended June 30, 2019 was $11 thousand and $12 thousand, respectively. Interest income from these agreements is recorded in Other income, net on the Consolidated Statements of Operations.

Receivables whose payment terms exceed one year are placed on nonaccrual 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 nonaccrual 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)

2020 (remaining 3 months)

$

1,526

2021

2,678

2022

2,300

2023

1,423

Total payments

7,927

Less: unearned income

666

Total, net of unearned income

$

7,261

7.            Inventories

Inventories consist of the following:

June 30, 

September 30,

    

2020

    

2019

(Amounts in thousands)

Raw materials

$

902

$

671

Work-in-process

 

430

93

Finished goods

 

5,080

7,054

Total

$

6,412

$

7,818

16


8.     Leases

Lessee

At the inception of an arrangement, the Company determines whether the arrangement contains a lease. This includes arrangements with goods and services to determine if there is an embedded lease. An arrangement containing a lease would allow the Company the right to control an implicitly or explicitly identified asset. If there is a lease in an arrangement, the classification is determined at inception of the arrangement. Certain leases may contain transfer of ownership or an option to purchase the underlying asset. The most relevant criterion for our lease classification is transfer of ownership, which if included in the arrangement makes the lease a finance lease rather than an operating lease.

The discount rate used to assess classification is the incremental borrowing rate at the commencement date due to the implicit rate not being readily determinable. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The lease term includes periods where we are reasonably certain we will exercise the renewal option. The Company has elected not to apply Subtopic ASC 842-25 to short-term leases, which are defined as a lease that has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Therefore, there are no right-of-use assets or lease liabilities related to short-term leases in the Consolidated Balance Sheets and the lease payments are expensed on a straight-line basis over the lease term. Leases are typically not able to be terminated without penalty. None of our lease arrangements contain residual value guarantees, restrictions, or covenants. None of the Company’s current leases are with related parties. The office lease in Lowell, Massachusetts was renewed through February 2022. Additionally, the office lease in Deerfield Beach, FL was renewed through June 2025. The right-of-use asset and lease liability was adjusted for the Lowell lease. The Deerfield Beach lease renewal period was included in the right-of-use asset and lease liability upon adoption of ASC 842 on October 1, 2019 because it was reasonably certain this renewal period would be exercised by the Company. There are no lease arrangements that we have entered into as of June 30, 2020 that have not yet commenced.

Operating leases

The Company has operating leases for office space, data centers, and other information technology equipment under various leases. Operating lease right-of-use assets and liabilities are recognized at the commencement date using the present value of the fixed lease payments over the lease term. We do not have leases with variable consideration. The incremental borrowing rate is used in determining present value. Certain operating leases, primarily office space and IT equipment, have an option to extend the lease. Renewal periods related to certain lease agreements related to office buildings are included in the lease term for lease accounting.

The Company has operating lease agreements with lease components (e.g. fixed payments including rent, real estate taxes, and insurance costs) as well as nonlease components (e.g. common-area maintenance, colocation services). The Company has elected to account for lease and nonlease components as one single lease component for all classes of assets. Lease expense is recognized on a straight-line basis over the lease term.

Finance leases

The Company has finance leases for information technology equipment and subleases all this equipment (see Lessor section below for details). All finance leases transfer ownership to the Company, which meets the criterion to be a finance lease. Due to our finance leases being subleases, there is no finance right-of-use assets. However, there is a net investment in lease in the Consolidated Balance Sheets.

Lessor

The Company is a lessor, but only as a sublessor. The process for identifying and classifying a lease is similar to the process described above in the lessee section. Additionally, the most relevant criteria to classification is transfer of ownership and present value of the total lease payments in relation to fair value of the underlying asset. The Company as a lessor has both sales-type and direct financing leases. The Company as a lessor does not have operating leases. All the

17


Company’s sublease agreements are bundled agreements containing managed services, software, and other services. The fixed payments under bundled agreements are allocated based on the relative standalone selling prices of the lease and non-lease deliverables are consistent with ASC 606. The allocation of the fixed payments may be calculated using a budgeted cost-plus margin approach if there are other services in addition to managed services. Due to the complex nature of these contracts, there is significant judgment in allocating the fixed payments. There is no variable consideration in these agreements. The discount rate used as a lessor pertaining to the lease component is the implicit rate. As sublessor, lease agreements contain an option to purchase the underlying asset or transfers ownership at the end of the lease. The leases typically do not have any residual value to the Company. In the Company’s sublessor agreements, the payments allocated to the lease component cannot be terminated. There were no new agreements where the Company was a lessor for the nine months ended June 30, 2020.

Information related to both lessee and lessor

The following table specifies where the right-of-use assets and lease liabilities are within the Consolidated Balance Sheets as of June 30, 2020 and October 1, 2019 (adoption date):

Consolidated Balance Sheets Location

    

June 30, 2020

 

October 1, 2019

(Amounts in thousands)

(Amounts in thousands)

Assets

Operating leases

Operating lease right-of-use assets

$

2,180

$

2,448

Lease receivable - current

Investment in lease, net-current portion

$

416

$

367

Lease receivable - noncurrent

Investment in lease, net-less current portion

103

417

Total lease receivable

$

519

$

784

Liabilities

 

 

Current operating lease liabilities

Accounts payable and accrued expenses

$

678

$

746

Non-current operating lease liabilities

Operating lease liabilities - noncurrent portion

1,562

1,783

Total operating lease liabilities

$

2,240

$

2,529

Current finance lease liabilities

Accounts payable and accrued expenses

$

348

$

334

Non-current finance lease liabilities

Other noncurrent liabilities

 

63

 

324

Total finance lease liabilities

$

411

$

658

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

Three months ended