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EX-31.1 - EX-31.1 - CSP INC /MA/cspi-20201231ex311754222.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           December 31, 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 February 5, 2021, the registrant had 4,373,966 shares of common stock issued and outstanding.


INDEX

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

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

3

Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2020 and 2019

4

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended December 31, 2020 and 2019

5

Consolidated Statement of Shareholders’ Equity (unaudited) for the three months ended December 31, 2020 and 2019

6

Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2020 and 2019

7

Notes to Consolidated Financial Statements (unaudited)

8

Item 2.

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

20

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

27

Item 6.

Exhibits

27


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

December 31, 

September 30,

    

2020

    

2020

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

19,927

$

19,264

Accounts receivable, net of allowances of $176 and $181

 

12,122

 

13,362

Investment in lease, net-current portion

 

251

 

336

Inventories

 

5,846

 

5,285

Refundable income taxes

 

1,332

 

807

Other current assets

 

2,461

 

2,535

Total current assets

 

41,939

 

41,589

Property, equipment and improvements, net

 

978

 

1,047

Operating lease right-of-use assets

1,847

2,014

Intangibles, net

 

26

 

28

Investment in lease, net-less current portion

 

63

 

81

Long-term receivable

3,542

 

3,642

Deferred income taxes

 

515

 

1,149

Cash surrender value of life insurance

 

3,981

 

3,948

Other assets

 

146

 

147

Total assets

$

53,037

$

53,645

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

8,888

$

8,523

Line of credit

802

1,573

Notes payable - current portion

729

1,613

Deferred revenue

 

1,212

 

947

Pension and retirement plans

 

322

 

321

Total current liabilities

 

11,953

 

12,977

Pension and retirement plans

 

6,767

 

6,471

Notes payable - noncurrent portion

1,109

2,485

Operating lease liabilities - noncurrent portion

1,216

1,390

Income taxes payable

 

586

 

586

Other noncurrent liabilities

 

154

 

202

Total liabilities

 

21,785

 

24,111

Shareholders’ equity:

 

  

 

  

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

 

43

 

43

Additional paid-in capital

 

17,259

 

16,994

Retained earnings

 

25,643

 

24,492

Accumulated other comprehensive loss

 

(11,693)

 

(11,995)

Total shareholders’ equity

 

31,252

 

29,534

Total liabilities and shareholders’ equity

$

53,037

$

53,645

See accompanying notes to unaudited consolidated financial statements.

3


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except for per share data)

For the three months ended

December 31, 

December 31, 

    

2020

    

2019

Sales:

 

  

 

  

 

Product

$

8,408

$

13,559

Services

 

2,980

 

3,299

Total sales

 

11,388

 

16,858

Cost of sales:

 

  

 

  

Product

 

6,949

 

11,604

Services

 

1,061

 

1,223

Total cost of sales

 

8,010

 

12,827

Gross profit

 

3,378

 

4,031

Operating expenses:

 

  

 

  

Engineering and development

 

729

 

672

Selling, general and administrative

 

3,186

 

3,761

Total operating expenses

 

3,915

 

4,433

Operating loss

 

(537)

 

(402)

Other income (expense):

 

  

 

  

Foreign exchange loss

 

(467)

 

(335)

Interest expense

 

(38)

 

(57)

Interest income

 

98

 

173

Gain on extinguishment of debt

2,196

Other income

 

9

 

11

Total other income (expense)

 

1,798

 

(208)

Income (loss) before income taxes

1,261

 

(610)

Income tax expense (benefit)

110

 

(70)

Net income (loss)

$

1,151

$

(540)

Net income (loss) attributable to common stockholders

$

1,097

$

(540)

Net income (loss) per share – basic

$

0.27

$

(0.14)

Weighted average shares outstanding – basic

 

4,074

 

3,963

Net income (loss) per share – diluted

$

0.26

$

(0.14)

Weighted average shares outstanding – diluted

 

4,172

 

3,963

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

December 31, 

December 31, 

    

2020

    

2019

Net income (loss)

$

1,151

 

$

(540)

Foreign currency translation gain adjustments

 

302

 

326

Total comprehensive income (loss)

$

1,453

 

$

(214)

See accompanying notes to unaudited consolidated financial statements.

5


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended December 31, 2020 and 2019:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended December 31, 2019:

    

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

 

 

 

 

(540)

 

 

(540)

Other comprehensive gain

 

 

 

 

 

326

 

326

Exercise of stock options

 

 

2

 

 

 

2

Stock-based compensation

 

 

 

205

 

 

 

205

Cash declared on common stock ($0.15 per share)

 

 

 

 

(623)

 

 

(623)

Balance as of December 31, 2019

 

4,154

$

42

$

15,940

$

26,083

$

(12,267)

$

29,798

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended December 31, 2020:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of September 30, 2020

 

4,276

$

43

$

16,994

$

24,492

$

(11,995)

$

29,534

Net income

 

 

 

 

1,151

 

 

1,151

Other comprehensive gain

 

 

 

 

 

302

 

302

Stock-based compensation

 

 

 

265

 

 

 

265

Balance as of December 31, 2020

 

4,276

$

43

$

17,259

$

25,643

$

(11,693)

$

31,252

See accompanying notes to unaudited consolidated financial statements.

6


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the three months ended

December 31, 

December 31, 

    

2020

    

2019

Operating activities

 

  

 

  

Net income (loss)

$

1,151

$

(540)

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

 

  

 

  

Depreciation

 

102

 

123

Amortization of intangibles

 

2

 

2

Loss on sale of fixed assets, net

1

Foreign exchange loss

 

467

 

335

Non-cash changes in accounts receivable

 

(6)

 

20

Non-cash changes in inventories

 

12

 

116

Non-cash lease expense

160

164

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

 

265

 

205

Deferred income taxes

 

634

 

(1)

Increase in cash surrender value of life insurance

 

(33)

 

(30)

Non-cash other

17

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

(2,196)

Changes in operating assets and liabilities:

 

  

 

  

Decrease in accounts receivable

 

1,300

 

2,718

(Increase) decrease in inventories

 

(572)

 

2,199

Decrease (increase) in refundable income taxes

 

(524)

 

(68)

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

8

(2,288)

Decrease in other assets

86

80

Decrease in investment in lease

 

102

 

82

Decrease in long-term receivable

101

70

Increase (decrease) in accounts payable and accrued expenses

 

415

 

(6,451)

(Decrease) increase in operating lease liabilities

(155)

2,320

Increase in deferred revenue

 

265

 

691

Increase in pension and retirement plans liabilities

 

15

 

9

Decrease in other long-term liabilities

 

(49)

 

(127)

Net cash provided by (used in) operating activities

 

1,567

 

(370)

Investing activities

 

  

 

  

Life insurance premiums paid

 

 

(60)

Purchases of property, equipment and improvements

 

(33)

 

(207)

Net cash used in investing activities

 

(33)

 

(267)

Financing activities

 

  

 

  

Net payments under line-of-credit agreement

(771)

(1,588)

Proceeds from debt

2,037

Repayments on debt

(81)

(506)

Principal payments on finance leases

 

(86)

 

(78)

Proceeds from issuance of shares under equity compensation plans

 

 

2

Net cash used in financing activities

 

(938)

 

(133)

Effects of exchange rate on cash

 

67

 

298

Net increase (decrease) in cash and cash equivalents

 

663

 

(472)

Cash and cash equivalents beginning of period

19,264

 

18,099

Cash and cash equivalents at end of period

$

19,927

$

17,627

Supplementary cash flow information:

 

  

 

  

Cash paid for income taxes

$

2

$

Cash paid for interest

$

94

$

111

Non-cash accrual of dividend payable

$

$

623

Supplementary non-cash financing activities:

Gain on extinguishment of debt

$

2,196

$

See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2020

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, 2020.

Revision of Prior Period Financial Statements

During the preparation of the consolidated financial statements for the year ended September 30, 2020, we identified an immaterial error in the first three quarters of fiscal year 2020 related to the recognition of certain revenue as “net,” when in fact the revenue should have been recorded on a “gross” basis. As a result of evaluating the error, we determined the impact was not material to our financial statements in any prior interim period. However, management has revised the first three quarters of fiscal year 2020. The first quarter revised numbers are reflected in this Form 10-Q. The only financial statement affected was the Consolidated Statement of Operations. Specifically, financial statement line items Sales - Product, Sales - Services, and Cost of sales – product. Net income (loss) and Gross profit did not change. Notes affected include Note 4 Revenue and Note 14 Segment Information.

For the three months ended December 31, 2019

As reported

Adjustment

As revised

Sales:

 

  

 

  

  

Product

$

13,222

$

337

$

13,559

Services

 

3,350

 

(51)

 

3,299

Total sales

 

16,572

 

286

 

16,858

Cost of sales:

 

  

 

  

 

  

Product

 

11,318

 

286

 

11,604

Services

 

1,223

 

 

1,223

Total cost of sales

 

12,541

 

286

 

12,827

Gross profit

$

4,031

$

$

4,031

Operating loss

$

(402)

$

$

(402)

Net loss

$

(540)

$

$

(540)

8


Net loss per share – basic

$

(0.14)

$

$

(0.14)

Net loss per share – diluted

$

(0.14)

$

$

(0.14)

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 2021

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

New accounting standards not adopted as of December 31, 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 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.

9


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.

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.

See disaggregated revenues below by products/services and geography.

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended December 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

1,176

$

1,403

$

5,818

$

7,221

$

8,397

Service

380

87

2,513

2,600

2,980

Finance *

11

11

11

Total sales

$

1,556

$

1,490

$

8,342

$

9,832

$

11,388

Technology Solutions Segment

10


High

Performance

Products

United

Consolidated

For the three months ended December 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2019

Sales:

Product

$

767

$

553

$

12,213

$

12,766

$

13,533

Service

274

126

2,899

3,025

3,299

Finance *

26

26

26

Total sales

$

1,041

$

679

$

15,138

$

15,817

$

16,858


*     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.

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

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

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

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

11


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 $0.8 million and $1.0 million as of December 31, 2020 and September 30, 2020, respectively. The current portion is recorded in other current assets on the consolidated balance sheets.  There were no non-current contract assets as of December 31, 2020 and September 30, 2020. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before the Company transfers a good or service to the customer. Current contract liabilities were $1.2 million and $0.9 million as of December 31, 2020 and September 30, 2020, respectively. The current portion of contract liabilities is recorded in deferred revenue on the consolidated balance sheets. The long-term portion of contract liabilities were $0.2 million and $0.2 million as of December 31, 2020 and September 30, 2020, respectively. These non-current liabilities are recorded in other noncurrent liabilities. Revenue recognized for the year ended December 31, 2020 that was included in contract liabilities as of the beginning of the period was $0.3 million.

Contract Costs

Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are equal to or less than a one-year period, are expensed as incurred, utilizing the practical expedient in ASC 340-40-25-4. For a period greater than one year, incremental contract costs are capitalized if the Company expects to recover these costs. The costs are amortized over the contract term and expected renewal periods. The period of amortization is generally three to six years. Incremental costs are related to commissions in the TS portion of the business. Current capitalized contract costs are within the other current assets on the consolidated balance sheets as of December 31, 2020 and September 30, 2020. The portion of current capitalized costs were $104 thousand and $130 thousand as of December 31, 2020 and September 30, 2020, 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 months ended December 31, 2020 and 2019 were $87 thousand and $78 thousand, respectively. This is recorded in selling, general, and administrative expenses. There was no impairment related to incremental costs capitalized during the three ended December 31, 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 $13 thousand as of December 31, 2020 and September 30, 2020, respectively. The portion of noncurrent capitalized costs as of December 31, 2020 and September 30, 2020 were $18 thousand and $22 thousand, respectively. The amount of fulfillment costs amortized for three months ended December 31, 2020 and 2019 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.

Other

Projects are typically billed upon completion or at certain milestones. Product and services are typically billed when shipped or as services are being performed. Payment terms are typically 30 days to pay in full except in Europe where it could be up to 90 days. Most of the Company’s contracts are less than one year. There are certain contracts that 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.

12


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 December 31, 2020 is set forth in the table below:

    

(Amounts in thousands)

Fiscal 2021 (remaining 9 months)

$

1,380

Fiscal 2022

592

Fiscal 2023

210

Fiscal 2024

30

$

2,212

5.            Earnings Per Share of Common Stock

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

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

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

For the three months ended

December 31, 

December 31, 

    

2020

    

2019

(Amounts in thousands except per share data)

Net income (loss)

 

$

1,151

  

$

(540)

 

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

 

54

  

 

Net loss attributable to common stockholders

$

1,097

  

$

(540)

Weighted average total shares outstanding – basic

 

4,277

  

 

3,963

Less: weighted average non–vested shares outstanding

 

203

  

 

Weighted average number of common shares outstanding – basic

 

4,074

  

 

3,963

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

 

98

  

 

Weighted average common shares outstanding – diluted

 

4,172

  

 

3,963

Net income (loss) per share – basic

$

0.27

  

$

(0.14)

Net income (loss) per share – diluted

$

0.26

  

$

(0.14)

Non-vested restricted stock awards of 190,000 shares were excluded from the diluted loss per share calculation for the three months ended December 31, 2019 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 $2.4

13


million and $3.4 million as of December 31, 2020. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $2.3 million and $3.5 million as of September 30, 2020, respectively. The receivables with a payment term exceeding one year carry an average weighted interest rate of 6.2%, 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, 2020 or September 30, 2020. There was no activity in the allowance for credit losses of these receivables for the three months ended December 31, 2020 and December 31, 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 months ended December 31, 2020 and 2019 was $92 thousand and $116 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)

2021

$

2,564

2022

2,300

2023

1,423

Total payments

6,287

Less: unearned income

469

Total, net of unearned income

$

5,818

7.            Inventories

Inventories consist of the following:

December 31, 

September 30,

    

2020

    

2020

(Amounts in thousands)

Raw materials

$

833

$

574

Work-in-process

 

426

213

Finished goods

 

4,587

4,498

Total

$

5,846

$

5,285

14


8.     Leases

Information related to both lessee and lessor

The components of lease costs for the three months ended December 31, 2020 and 2019 are as follows:

Three months ended

Consolidated Statements of Operations Location

Consolidated Statements of Operations Location

December 31, 2020

December 31, 2019

(Amounts in thousands)

Finance Lease:

Interest on lease liabilities

Selling, general, and administrative

$

5

$

13

Operating Lease:

 

 

Operating lease cost

Selling, general, and administrative

 

188

 

180

Short-term lease cost

Selling, general, and administrative

3

3

Total lease costs

$

196

$

196

Less sublease interest income

Revenue

(11)

(26)

Total lease costs, net of sublease interest income

$

185

$

170

Supplemental cash flow information related to leases for the three months ended December 31, 2020 and 2019 are below:

Three months ended

December 31, 2020

December 31, 2019

(Amounts in thousands)

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

Operating cash flows from operating leases

$

191

$

188

Operating cash flows from short-term leases

10

9

Operating cash flows from finance leases

5

13

Financing cash flows from finance leases

86

78

Lease assets obtained in exchange for new lease liabilities

Operating leases

4

Cash received from subleases

113

113

9.     Notes Payable and Line of Credit

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

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

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

The SBA Loans provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, materially false or misleading representations to Lender or SBA, and adverse changes in the financial condition or business operations that Lender believed could materially affect Borrowers’ ability to pay the SBA

15


Loans. The Borrowers did not provide any collateral or guarantees for the SBA Loans and the Borrowers could prepay the principal of the SBA Loans at any time without penalty.

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

Interest expense related to the notes for the three months ended December 31, 2020 and 2019 was $23 thousand and $30 thousand, respectively. Below are details of the notes payable.

December 31, 2020

September 30, 2020

(Amounts in thousands)

Current

$

808

$

1,702

Less: notes discount

79

 

89

Notes payable - current portion

$

729

$

1,613

Noncurrent

$

1,166

$

2,559

Less: notes discount

57

 

74

Notes payable - noncurrent portion

$

1,109

$

2,485

As of December 31, 2020 and September 30, 2020, the Company maintained an inventory line of credit with a borrowing capacity of $15.0 million. It may be used by the TS and HPP segments in the U.S. to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. No interest accrues under the inventory line of credit when advances are paid within terms, however, late payments are subject to an interest charge of Prime plus 5%. The credit agreement for the inventory line of credit contains financial covenants which require the Company to maintain the following TS segment-specific financial ratios: (1) a minimum current ratio of 1.2, (2) tangible net worth of no less than $4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0:1. As of December 31, 2020 and September 30, 2020, Company borrowings, all from the TS segment, under the inventory line of credit were $0.8 million and $1.6 million, respectively, and the Company was in compliance with all financial covenants. As of December 31, 2020 and September 30, 2020 this line of credit also includes availability of a limited cash withdrawal of up to $1.0 million and $1.5 million, respectively. As of December 31, 2020 and September 30, 2020 there were no cash withdrawals outstanding.

10.            Pension and Retirement Plans

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

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

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

16


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

Three Months Ended December 31, 

2020

2019

    

U.K.

    

U.S.

    

Total

    

U.K.

    

U.S.

    

Total

(Amounts in thousands)

Pension:

Interest cost

$

58

$

3

$

61

$

66

$

4

$

70

Expected return on plan assets

 

(97)

 

 

(97)

 

(74)

 

 

(74)

Amortization of past service costs

2

2

1

1

Amortization of net gain

 

44

 

1

 

45

 

48

 

1

 

49

Net periodic benefit cost

$

7

$

4

$

11

$

41

$

5

$

46

Post Retirement:

 

  

 

  

 

  

 

  

 

  

 

  

Service cost

$

$

11

$

11

$

$

10

$

10

Interest cost

 

 

11

 

11

 

 

12

 

12

Amortization of net gain

 

 

13

 

13

 

 

6

 

6

Net periodic cost

$

$

35

$

35

$

$

28

$

28

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, 2020

September 30, 2020

Fair Value Measurements Using Inputs Considered as

Fair Value Measurements Using Inputs Considered as

Asset Category

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

(Amounts in thousands)

Cash on deposit

$

399

$

399

$

$

$

471

$

471

$

$

Pooled funds

 

10,574

 

10,574

 

 

9,269

 

9,269

 

Total plan assets

$

10,973

$

10,973

$

$

$

9,740

$

9,740

$

$

11.            Income Taxes

An income tax provision of $110 thousand was recorded for the three months ended December 31, 2020 compared to an income tax benefit of $70 thousand in the same period of 2019. The increase in tax expense is primarily related to the write down of a deferred tax asset as a result of the change in tax law, allowing for the immediate deduction of covered expenses incurred through the Paycheck Protection Program (“PPP”) loan with an associated change in the valuation allowance against deferred tax assets from the prior period, offset by the forgiveness of the PPP Loans for which the income is excluded for tax purposes. This additional expense was recorded discretely during the quarter. In the prior period, the Company established a deferred tax asset for these expenses that were expected to be deductible in a future period.

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

12.            Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

December 31, 

September 30,

    

2020

    

2020

(Amounts in thousands)

Cumulative effect of foreign currency translation

$

(4,394)

$

(4,696)

Cumulative unrealized loss on pension liability

 

(7,299)

 

(7,299)

Accumulated other comprehensive loss

$

(11,693)

$

(11,995)

17


13.          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 10) or non-recurring basis as of December 31, 2020 or September 30, 2020.

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

As of December 31, 2020

As of September 30, 2020

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Fair Value Level

Reference

(Amounts in thousands)

Assets:

Cash and cash equivalents

$

19,927

$

19,927

$

19,264

$

19,264

1

Consolidated Balance Sheets

Accounts and long-term receivable*

5,818

5,818

5,839

5,839

3

Note 6

Liabilities:

Notes payable

1,838

1,838

4,098

4,098

2

Note 9

*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.

Notes Payable

Fair value was estimated based on quoted market prices.

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

18


14.            Segment Information

The following tables present certain operating segment information for three months ended December 31, 2020 and 2019.

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended December 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

1,176

$

1,403

$

5,829

$

7,232

$

8,408

Service

 

380

 

87

 

2,513

 

2,600

 

2,980

Total sales

$

1,556

$

1,490

$

8,342

$

9,832

$

11,388

Income (loss) from operations

$

(854)

$

31

$

286

$

317

$

(537)

Total assets

$

9,192