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EX-31.1 - EX-31.1 - CSP INC /MA/cspi-20210331ex3115a3dc1.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           March 31, 2021

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 May 5, 2021, the registrant had 4,393,966 shares of common stock issued and outstanding.


INDEX

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets (unaudited) as of March 31, 2021 and September 30, 2020

3

Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2021 and 2020

4

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended March 31, 2021 and 2020

5

Consolidated Statement of Shareholders’ Equity (unaudited) for the three and six months ended March 31, 2021 and 2020

6

Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2021 and 2020

8

Notes to Consolidated Financial Statements (unaudited)

9

Item 2.

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

25

Item 4.

Controls and Procedures

35

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

36

Item 6.

Exhibits

36


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

March 31, 

September 30,

    

2021

    

2020

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

20,397

$

19,264

Accounts receivable, net of allowances of $219 and $181

 

15,168

 

13,362

Investment in lease, net-current portion

 

162

 

336

Inventories

 

4,221

 

5,285

Refundable income taxes

 

1,229

 

807

Other current assets

 

3,600

 

2,535

Total current assets

 

44,777

 

41,589

Property, equipment and improvements, net

 

891

 

1,047

Operating lease right-of-use assets

1,686

2,014

Intangibles, net

 

23

 

28

Investment in lease, net-less current portion

 

47

 

81

Long-term receivable

7,818

 

3,642

Deferred income taxes

 

 

1,149

Cash surrender value of life insurance

 

4,079

 

3,948

Other assets

 

99

 

147

Total assets

$

59,420

$

53,645

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

$

10,145

$

8,523

Line of credit

1,190

1,573

Notes payable - current portion

739

1,613

Deferred revenue

 

1,402

 

947

Pension and retirement plans

 

313

 

321

Total current liabilities

 

13,789

 

12,977

Pension and retirement plans

 

6,834

 

6,471

Notes payable - noncurrent portion

1,032

2,485

Operating lease liabilities - noncurrent portion

1,074

1,390

Income taxes payable

 

586

 

586

Other noncurrent liabilities

 

5,304

 

202

Total liabilities

 

28,619

 

24,111

Shareholders’ equity:

 

  

 

  

Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,394 and 4,276 shares, respectively

 

44

 

43

Additional paid-in capital

 

17,605

 

16,994

Retained earnings

 

24,796

 

24,492

Accumulated other comprehensive loss

 

(11,644)

 

(11,995)

Total shareholders’ equity

 

30,801

 

29,534

Total liabilities and shareholders’ equity

$

59,420

$

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

For the six months ended

March 31, 

March 31, 

March 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

Sales:

 

  

 

  

  

 

  

 

Product

$

10,976

$

13,146

$

19,384

$

26,705

Services

 

3,112

 

3,737

 

6,092

 

7,036

Total sales

 

14,088

 

16,883

 

25,476

 

33,741

Cost of sales:

 

  

 

  

 

  

 

  

Product

 

8,553

 

11,033

 

15,502

 

22,637

Services

 

1,167

 

1,367

 

2,228

 

2,590

Total cost of sales

 

9,720

 

12,400

 

17,730

 

25,227

Gross profit

 

4,368

 

4,483

 

7,746

 

8,514

Operating expenses:

 

  

 

  

 

  

 

  

Engineering and development

 

762

 

716

 

1,491

 

1,388

Selling, general and administrative

 

3,727

 

3,910

 

6,913

 

7,671

Total operating expenses

 

4,489

 

4,626

 

8,404

 

9,059

Operating loss

 

(121)

 

(143)

 

(658)

 

(545)

Other income (expense):

 

  

 

  

 

  

 

  

Foreign exchange (loss) gain

 

(154)

 

479

 

(621)

 

144

Interest expense

 

(75)

 

(55)

 

(113)

 

(112)

Interest income

 

133

 

163

 

231

 

336

Gain on forgiveness of debt

2,196

Other income (expense)

 

93

 

(7)

 

102

 

4

Total other income (expense)

 

(3)

 

580

 

1,795

 

372

(Loss) income before income taxes

(124)

 

437

1,137

 

(173)

Income tax expense

723

 

1,169

833

 

1,099

Net (loss) income

$

(847)

$

(732)

$

304

$

(1,272)

Net (loss) income attributable to common stockholders

$

(847)

$

(732)

$

289

$

(1,272)

Net (loss) income per share – basic

$

(0.20)

$

(0.18)

$

0.07

$

(0.32)

Weighted average shares outstanding – basic

 

4,158

 

4,036

 

4,117

 

3,999

Net (loss) income per share – diluted

$

(0.20)

$

(0.18)

$

0.07

$

(0.32)

Weighted average shares outstanding – diluted

 

4,158

 

4,036

 

4,202

 

3,999

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 six months ended

March 31, 

March 31, 

March 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

Net (loss) income

$

(847)

 

$

(732)

$

304

 

$

(1,272)

Foreign currency translation gain (loss) adjustments

 

49

 

(302)

 

351

 

24

Total comprehensive (loss) income

$

(798)

 

$

(1,034)

$

655

 

$

(1,248)

See accompanying notes to unaudited consolidated financial statements.

5


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three and six months ended March 31, 2021 and 2020:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended March 31, 2020:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of December 31, 2019

 

4,154

$

42

$

15,940

$

26,083

$

(12,267)

$

29,798

Net loss

 

 

 

 

(732)

 

 

(732)

Other comprehensive loss

 

 

 

 

 

(302)

 

(302)

Purchase of common stock

 

(6)

 

 

(43)

 

 

(43)

Stock-based compensation

 

 

 

250

 

 

 

250

Restricted stock issuance

 

97

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

9

110

110

Cash paid on common stock ($0.15 per share)

 

 

 

 

(640)

 

 

(640)

Balance as of March 31, 2020

 

4,254

$

43

$

16,300

$

24,668

$

(12,569)

$

28,442

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the Three Months Ended March 31, 2021:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of December 31, 2020

 

4,276

$

43

$

17,259

$

25,643

$

(11,693)

$

31,252

Net loss

 

 

 

 

(847)

 

 

(847)

Other comprehensive gain

 

 

 

 

 

49

 

49

Stock-based compensation

 

 

 

240

 

 

 

240

Restricted stock issuance

 

103

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

15

 

 

106

 

 

 

106

Balance as of March 31, 2021

 

4,394

$

44

$

17,605

$

24,796

$

(11,644)

$

30,801

See accompanying notes to unaudited consolidated financial statements.

6


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three and six months ended March 31, 2021 and 2020:

(Amounts in thousands, except per share data)

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the six months ended March 31, 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

 

 

 

 

(1,272)

 

 

(1,272)

Other comprehensive gain

 

 

 

 

 

24

 

24

Exercise of stock options

 

 

 

2

 

 

 

2

Stock-based compensation

 

 

 

455

 

 

 

455

Restricted stock issuance

 

97

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

9

 

 

110

 

 

 

110

Purchase of common stock

(6)

(43)

(43)

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

 

 

 

 

(1,263)

 

 

(1,263)

Balance as of March 31, 2020

 

4,254

$

43

$

16,300

$

24,668

$

(12,569)

$

28,442

Accumulated

Additional

other

Total

Paid-in

Retained

comprehensive

Shareholders’

For the six months ended March 31, 2021:

    

Shares

    

Amount

    

Capital

    

Earnings

    

loss

    

Equity

Balance as of September 30, 2020

 

4,276

$

43

$

16,994

$

24,492

$

(11,995)

$

29,534

Net income

 

 

 

 

304

 

 

304

Other comprehensive gain

 

 

 

 

 

351

 

351

Stock-based compensation

 

 

 

505

 

 

 

505

Restricted stock issuance

 

103

 

1

 

 

 

 

1

Issuance of shares under employee stock purchase plan

 

15

 

 

106

 

 

 

106

Balance as of March 31, 2021

 

4,394

$

44

$

17,605

$

24,796

$

(11,644)

$

30,801

See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For the six months ended

March 31, 

March 31, 

    

2021

    

2020

Operating activities

 

  

 

  

Net income (loss)

$

304

$

(1,272)

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

 

  

 

  

Depreciation

 

197

 

235

Amortization of intangibles

 

5

 

4

Loss on sale of fixed assets, net

9

Foreign exchange loss (gain)

 

621

 

(144)

Non-cash changes in accounts receivable

 

36

 

97

Non-cash changes in inventories

 

24

 

238

Non-cash lease expense

320

322

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

 

505

 

455

Deferred income taxes

 

1,149

 

1,946

Increase in cash surrender value of life insurance

 

(61)

 

(51)

Non-cash other

68

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

(2,196)

Changes in operating assets and liabilities:

 

  

 

  

(Increase) decrease in accounts receivable

 

(1,824)

 

2,206

Decrease in inventories

 

1,043

 

1,149

Increase in refundable income taxes

 

(423)

 

(169)

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

9

(2,131)

Increase in other assets

(1,005)

(473)

Decrease in investment in lease

 

208

 

178

(Increase) decrease in long-term receivable

(4,176)

176

Increase (decrease) in accounts payable and accrued expenses

 

1,701

 

(6,421)

(Decrease) increase in operating lease liabilities

(279)

2,076

Increase in deferred revenue

 

455

 

637

Increase in pension and retirement plans liabilities

 

31

 

18

Decrease in income taxes payable

 

 

(694)

Increase (decrease) in other long-term liabilities

 

5,100

 

(252)

Net cash provided by (used in) operating activities

 

1,812

 

(1,861)

Investing activities

 

  

 

  

Life insurance premiums paid

 

(70)

 

(144)

Purchases of property, equipment and improvements

 

(43)

 

(240)

Net cash used in investing activities

 

(113)

 

(384)

Financing activities

 

  

 

  

Dividends paid

 

 

(1,263)

Net payments under line-of-credit agreement

(382)

(874)

Proceeds from debt

2,037

Repayments on debt

(164)

(565)

Principal payments on finance leases

 

(173)

 

(157)

Purchase of common stock

(43)

Proceeds from issuance of shares under equity compensation plans

 

106

 

112

Net cash used in financing activities

 

(613)

 

(753)

Effects of exchange rate on cash

 

47

 

141

Net increase (decrease) in cash and cash equivalents

 

1,133

 

(2,857)

Cash and cash equivalents beginning of period

19,264

 

18,099

Cash and cash equivalents at end of period

$

20,397

$

15,242

Supplementary cash flow information:

 

  

 

  

Cash paid for income taxes

$

107

$

16

Cash paid for interest

$

100

$

154

Supplementary non-cash financing activities:

Gain on forgiveness of debt

$

2,196

$

See accompanying notes to unaudited consolidated financial statements.

8


CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021

Organization and Business

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

1.            Basis of Presentation

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

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited consolidated financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

Revision of Prior Period Financial Statements

During the preparation of the consolidated financial statements for the year ended September 30, 2020, we identified an immaterial error in the first three quarters of fiscal year 2020 related to the recognition of certain revenue as “net,” when in fact the revenue should have been recorded on a “gross” basis. As a result of evaluating the error, we determined the impact was not material to our financial statements in any prior interim period. However, management has revised the first three quarters of fiscal year 2020. The revised numbers for the three and six months ended March 31, 2020 are reflected in this Form 10-Q. The only financial statement affected was the Consolidated Statement of Operations. Specifically, financial statement line items Sales - Product, Sales - Services, and Cost of sales – product. Net income (loss) and gross profit did not change. Notes affected include Note 4 Revenue and Note 15 Segment Information.

For the three months ended March 31, 2020

For the six months ended March 31, 2020

As reported

Adjustment

As revised

As reported

Adjustment

As revised

Sales:

  

 

  

  

 

  

 

  

  

Product

$

12,296

$

850

$

13,146

$

25,518

$

1,187

$

26,705

Services

 

3,799

 

(62)

 

3,737

 

7,149

 

(113)

 

7,036

Total sales

 

16,095

 

788

 

16,883

 

32,667

 

1,074

 

33,741

Cost of sales:

 

  

 

  

 

  

 

  

 

  

 

  

Product

 

10,245

 

788

 

11,033

 

21,563

 

1,074

 

22,637

Services

 

1,367

 

 

1,367

 

2,590

 

 

2,590

Total cost of sales

 

11,612

 

788

 

12,400

 

24,153

 

1,074

 

25,227

Gross profit

$

4,483

$

$

4,483

$

8,514

$

$

8,514

Operating loss

$

(143)

$

$

(143)

$

(545)

$

$

(545)

Net loss

$

(732)

$

$

(732)

$

(1,272)

$

$

(1,272)

Net loss per share – basic

$

(0.18)

$

$

(0.18)

$

(0.32)

$

$

(0.32)

Net loss per share – diluted

$

(0.18)

$

$

(0.18)

$

(0.32)

$

$

(0.32)

9


2.            Use of Estimates

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

3.            Recent Accounting Pronouncements

Accounting standards adopted in fiscal year 2021

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

New accounting standards not adopted as of March 31, 2021

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), an amendment of the FASB Accounting Standards Codification. This ASU will change how entities account for credit losses for most financial assets and certain other instruments. For trade receivables, loans and held-to-maturity debt securities entities will be required to estimate lifetime expected credit losses. For available-for-sale debt securities entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. Additionally, there will be a significant increase in the amount of disclosures by year of origination for certain financing receivables. For public entities classified as a smaller reporting company, the new standard is effective for annual periods beginning after December 15, 2022 (ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates), including interim periods within that annual period. The Company is evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

4.            Revenue

We derive revenue from the sale of integrated hardware and software, third-party service contracts, professional services, managed services, financing of hardware and software, and other services.

We recognize revenue from hardware upon transfer of control, which is at a point in time typically upon shipment when title transfers. Revenue from software is recognized at a point in time when the license is granted.

Professional services generally include implementation, installation, and training services. Professional services are considered a series of distinct services that form one performance obligation and revenue is recognized over time as services are performed.

Revenue generated from managed services is recognized over the term of the contract. Certain managed services contracts include financing of hardware and software. Revenues from arrangements which include financing are allocated considering relative standalone selling prices of lease and non-lease components within the agreement. The lease

10


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.

11


See disaggregated revenues below by products/services and geography.

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2021

Sales:

Product

$

716

$

241

$

10,012

$

10,253

$

10,969

Service

172

90

2,850

2,940

3,112

Finance *

7

7

7

Total sales

$

888

$

331

$

12,869

$

13,200

$

14,088

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the three months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

922

$

184

$

12,017

$

12,201

$

13,123

Service

553

84

3,100

3,184

3,737

Finance *

23

23

23

Total sales

$

1,475

$

268

$

15,140

$

15,408

$

16,883

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the six months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2021

Sales:

Product

$

1,892

$

1,644

$

15,830

$

17,474

$

19,366

Service

552

177

5,363

5,540

6,092

Finance *

18

18

18

Total sales

$

2,444

$

1,821

$

21,211

$

23,032

$

25,476

Technology Solutions Segment

High

Performance

Products

United

Consolidated

For the six months ended March 31, 

    

Segment

    

Kingdom

    

U.S.

    

Total

    

Total

(Amounts in thousands)

2020

Sales:

Product

$

1,689

$

737

$

24,230

$

24,967

$

26,656

Service

827

210

5,999

6,209

7,036

Finance *

49

49

49

Total sales

$

2,516

$

947

$

30,278

$

31,225

$

33,741


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

12


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.

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 $2.0 million and $1.0 million as of March 31, 2021 and September 30, 2020, respectively. The current portion is recorded in other current assets on the consolidated balance sheets.  There were no noncurrent contract assets as of March 31, 2021 and September 30, 2020. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before the Company transfers a good or service to the customer. Current contract liabilities were $1.4 million and $0.9 million as of March 31, 2021 and September 30, 2020, respectively. The current portion of contract liabilities is recorded in deferred revenue on the consolidated balance sheets. The long-term portion of contract liabilities were $0.1 million and $0.2 million as of March 31, 2021 and September 30,

13


2020, respectively. These noncurrent liabilities are recorded in other noncurrent liabilities. Revenue recognized for the six months ended that was included in contract liabilities as of the beginning of the period was $0.5 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 March 31, 2021 and September 30, 2020. The portion of current capitalized costs were $106 thousand and $130 thousand as of March 31, 2021 and September 30, 2020, respectively. There are no noncurrent capitalized costs on the consolidated balance sheets as these commissions are paid annually even when the contract extends beyond a one year period. The amount of incremental costs amortized for the three months ended March 31, 2021 and 2020 were $84 thousand and $84 thousand, respectively. The amount of incremental costs amortized for the six months ended March 31, 2021 and 2020 were $171 thousand and $162 thousand, respectively. This is recorded in selling, general, and administrative expenses. There was no impairment related to incremental costs capitalized during the three and six months ended March 31, 2021.

Costs to fulfill a contract are capitalized when the costs are related to a contract or anticipated contract, generate or enhance resources that will be used in satisfying performance obligations in the future, and costs are recoverable. Costs to fulfill a contract are related to the TS portion of the business and involve activities performed before managed services can be completed. Current capitalized fulfillment costs are in the other current assets and noncurrent costs are in other assets on the consolidated balance sheets. The portion of current capitalized costs were $13 thousand as of March 31, 2021 and $13 thousand as of September 30, 2020. The portion of noncurrent capitalized costs were $16 thousand and $22 thousand as of March 31, 2021 and September 30, 2020, respectively. The amount of fulfillment costs amortized for three and six months ended March 31, 2021 were $3 thousand and $6 thousand, respectively. These costs amortized were recorded in cost of sales. The amount of fulfillment costs amortized for three and six months ended March 31, 2020 were $3 thousand and $6 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 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.

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 March 31, 2021 is set forth in the table below:

    

(Amounts in thousands)

Fiscal 2021 (remaining 6 months)

$

830

Fiscal 2022

596

Fiscal 2023

211

Fiscal 2024

32

$

1,669

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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

For the six months ended

March 31, 

March 31, 

March 31, 

March 31, 

    

2021

    

2020

    

2021

    

2020

(Amounts in thousands except per share data)

Net income (loss)

 

$

(847)

  

$

(732)

 

304

  

(1,272)

 

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

 

  

 

15

  

 

Net income (loss) attributable to common stockholders

$

(847)

  

$

(732)

$

289

  

$

(1,272)

Weighted average total shares outstanding – basic

 

4,158

  

 

4,036

 

4,326

  

 

3,999

Less: weighted average non–vested shares outstanding

 

  

 

 

209

  

 

Weighted average number of common shares outstanding – basic

 

4,158

  

 

4,036

 

4,117

  

 

3,999

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

 

  

 

 

85

  

 

Weighted average common shares outstanding – diluted

 

4,158

  

 

4,036

 

4,202

  

 

3,999

Net income (loss) per share – basic

$

(0.20)

  

$

(0.18)

$

0.07

  

$

(0.32)

Net income (loss) per share – diluted

$

(0.20)

  

$

(0.18)

$

0.07

  

$

(0.32)

Non-vested restricted stock awards of 218,000 shares were excluded from the diluted loss per share calculation for the three months ended March 31, 2021. Non-vested restricted stock awards of 204,000 and 197,000 shares were excluded from the diluted loss per share calculation for the three and six months ended March 31, 2020, respectively. These awards were excluded because there was a net loss for these periods and their inclusion would have been anti-dilutive.

6.            Accounts and Long-Term Receivable

Within accounts receivable and long-term receivable there are amounts due reflecting sales whose payment terms exceed one year. This financing is separate from agreements with a leasing component, see Note 8 Leases for financing through leases. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $6.0 million and $7.7 million as of March 31, 2021. These receivables are included in Accounts Receivable and Long-Term Receivable in the amount of $2.3 million and $3.5 million as of September 30, 2020, respectively. There were two new agreements effective in the second quarter of fiscal year 2021 causing an increase in accounts and long-term receivable. These agreements included approximately $9.0 million of payments to be received over the next 4 years from March 31, 2021. It was determined we were acting as the agent in the transactions and recorded net revenue of approximately $0.5 million during the second quarter of fiscal year 2021. The receivables with a payment term exceeding one year carry an

15


average weighted interest rate of 4.8%, which reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement.

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 March 31, 2021 or September 30, 2020. There was no activity in the allowance for credit losses of these receivables for the six months ended March 31, 2021 and March 31, 2020, respectively. All these agreements are looked at as one portfolio in determining credit losses. There are various factors that are considered in extending a customer payment terms longer than one year including payment history, economic conditions, and capacity to pay. The credit quality of customers is monitored by payment activity. The unearned income represents a rate similar to market at the inception of the agreement.

The amount of interest income earned from sales whose payment terms exceed one year for the three months ended March 31, 2021 and 2020 was $126 thousand and $114 thousand, respectively. The amount of interest income earned from sales whose payment terms exceed one year for the six months ended March 31, 2021 and 2020 was $218 thousand and $230 thousand, respectively. Interest income from these agreements is recorded in Other income (expense), net on the Consolidated Statements of Operations.

Receivables whose payment terms exceed one year are placed on non-accrual status, meaning interest income stops being recorded, when the customer has a past due amount in excess of 30 days or reasonable doubt exists in collecting all interest and principal. A payment due in excess of 30 days is considered delinquent. If a payment is received for a receivable on non-accrual status the payment is first applied to interest and then principal. Recording interest income resumes once no reasonable doubt exists regarding collecting all interest and principal.

Contractual maturities of outstanding financing with an original contractual maturity over one year are as follows:

Fiscal year ending September 30:

    

(Amounts in thousands)

2021

$

4,628

2022

3,860

2023

2,983

2024