CSP (CSPI) - 2025 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2025, compared to the same periods in 2024, including balance sheets, statements of operations, comprehensive income, shareholders' equity, cash flows, and related notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 (in thousands) | September 30, 2024 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $26,308 | $30,585 | ($4,277) | | Accounts receivable, net | $13,453 | $14,494 | ($1,041) | | Inventories | $3,532 | $2,293 | $1,239 | | Total assets | $66,784 | $69,436 | ($2,652) | | Line of credit | $1,141 | $4,169 | ($3,028) | | Total liabilities | $19,300 | $22,166 | ($2,866) | | Total shareholders' equity | $47,484 | $47,270 | $214 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2025 (in thousands) | Q3 2024 (in thousands) | YTD 2025 (in thousands) | YTD 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total sales | $15,448 | $13,105 | $44,265 | $42,186 | | Gross profit | $4,453 | $4,582 | $13,224 | $15,155 | | Operating (loss) income | ($1,223) | ($720) | ($2,571) | $171 | | Net (loss) income | ($264) | ($185) | $100 | $1,330 | | Net (loss) income per share - diluted | ($0.03) | ($0.02) | $0.01 | $0.13 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended June 30, 2025 (in thousands) | Nine Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $370 | $5,721 | | Net cash used in investing activities | ($174) | ($238) | | Net cash used in financing activities | ($4,454) | ($1,824) | | Net (decrease) increase in Cash | ($4,277) | $3,674 | Note 2. Revenue Revenue is derived from Technology Solutions (TS) and High Performance Products (HPP) segments, with detailed breakdowns by segment, geography, and recognition timing Total Revenue by Segment (in thousands) | Segment | Q3 2025 (in thousands) | Q3 2024 (in thousands) | YTD 2025 (in thousands) | YTD 2024 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Technology Solutions (TS) | $15,064 | $12,526 | $42,804 | $38,393 | | High Performance Products (HPP) | $384 | $579 | $1,461 | $3,793 | | Consolidated Total | $15,448 | $13,105 | $44,265 | $42,186 | - For the nine months ended June 30, 2025, revenue from the United States constituted the vast majority of sales, totaling $39.0 million out of a consolidated total of $44.3 million[44] - As of June 30, 2025, the company has $3.6 million in unsatisfied performance obligations for contracts with terms longer than one year, with revenue expected to be recognized through fiscal year 2029[51] Note 5. Financing Receivables, Net The company's TS U.S. division offers financing to customers with payment terms exceeding one year, categorizing receivables by risk ratings, totaling $6.9 million net as of June 30, 2025 Financing Receivables, Net by Risk Rating (in thousands) | Risk Rating | June 30, 2025 (in thousands) | September 30, 2024 (in thousands) | | :--- | :--- | :--- | | Low | $4,209 | $6,527 | | Moderate | $1,604 | $779 | | High | $1,125 | $0 | | Total, Net | $6,938 | $7,306 | - Interest income from these financing agreements was $0.4 million for the nine months ended June 30, 2025, down from $0.5 million in the prior-year period[66] Note 10. Pension and Retirement Plans The company maintains U.K. and U.S. pension plans, having entered a £8.5 million buy-in contract for its U.K. defined benefit plan in October 2024 as part of a planned termination - In October 2024, the company paid £8.5 million to enter a buy-in contract for its U.K. pension plan, transferring the payment liability to an insurer, though legal responsibility remains with the company until a full buy-out[86] - The buy-in contract is classified as a Level 3 fair value asset, valued at $8.8 million as of March 31, 2025, with its value sensitive to changes in the 20-year U.K. gilt yield[89][91] Note 14. Segment Information This note details the financial performance of Technology Solutions (TS) and High Performance Products (HPP) segments, with TS generating $2.5 million operating income on $42.8 million sales, and HPP incurring a $5.1 million operating loss on $1.5 million sales for the nine months ended June 30, 2025 Segment Performance - Nine Months Ended June 30, 2025 (in thousands) | Segment | Total Sales (in thousands) | Operating (Loss) Income (in thousands) | | :--- | :--- | :--- | | Technology Solutions (TS) | $42,804 | $2,497 | | High Performance Products (HPP) | $1,461 | ($5,068) | | Consolidated Total | $44,265 | ($2,571) | - The HPP segment's operating loss significantly widened from ($2.7) million in YTD 2024 to ($5.1) million in YTD 2025, contributing to the consolidated operating loss[106] - The company has significant customer concentration in its financing receivables, with five customers (A, B, C, D, E) representing 75% of the total balance as of June 30, 2025[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, noting an 18% Q3 2025 sales increase but gross margin decline, and for the nine-month period, 5% sales growth with a swing to a $2.6 million operating loss from $0.2 million income, primarily due to HPP segment performance and reduced operating cash flow Results of Operations For the nine months ended June 30, 2025, consolidated sales increased 5% to $44.3 million, driven by 11% TS growth offset by 61% HPP decline, resulting in a gross margin drop from 36% to 30% and an operating loss of $2.6 million - TS segment sales increased by $4.4 million (11%) for the nine months ended June 30, 2025, primarily due to higher product sales to existing major customers[138] - HPP segment sales decreased by $2.3 million (61%) for the nine months ended June 30, 2025, mainly because a large $2.0 million ARIA AZT order from the prior year did not recur[139] - The overall HPP segment gross margin percentage dropped from 73% to 49% year-over-year for the nine-month period, significantly impacting consolidated profitability[143] - Selling, General and Administrative (SG&A) expenses increased by $0.6 million (5%) year-over-year, driven by higher stock compensation, salaries, and costs related to the U.K. pension plan termination[146] Liquidity and Capital Resources Cash and cash equivalents decreased by $4.3 million to $26.3 million due to a sharp decline in operating cash flow to $0.4 million and increased financing activities, though management believes current liquidity is sufficient for the next 12 months Summary of Cash Flows (in thousands) | Activity | Nine Months Ended June 30, 2025 (in thousands) | Nine Months Ended June 30, 2024 (in thousands) | | :--- | :--- | :--- | | Operating Activities | $370 | $5,721 | | Investing Activities | ($174) | ($238) | | Financing Activities | ($4,454) | ($1,824) | | Net Change in Cash | ($4,277) | $3,674 | - The significant decrease in operating cash flow was primarily due to decreased collections of Accounts Receivable ($2.5 million) and increased payments for Inventories ($1.2 million)[157] - The company maintains a $15.0 million line of credit, with $13.9 million available as of June 30, 2025[162] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2025, due to two un-remediated material weaknesses from fiscal year 2024 related to corporate credit card expenses and income tax reporting, with active remediation plans underway - Disclosure controls and procedures were deemed ineffective as of June 30, 2025, because two material weaknesses identified in fiscal 2024 have not yet been fully remediated[166][167] - Material Weakness 1 pertains to control deficiencies in the business expense reimbursement policy and a legacy credit card program, which led to inadequate review and undisclosed compensation for a C-level executive[169] - Material Weakness 2 relates to internal controls over financial reporting for income taxes, stemming from a lack of competency from a former third-party provider and the need for a more comprehensive management review[172] - Remediation efforts include updating the credit card policy, implementing internal audits, and hiring a new global accounting firm to assist with tax provisions and enhance internal controls[173][180] PART II. OTHER INFORMATION Item 1A. Risk Factors This section notes no material changes to prior risk factors, except for a new risk addressing potential adverse effects from significant political, trade, and regulatory developments, including new U.S. tariffs - A new risk factor was added concerning significant political, trade, or regulatory developments that are beyond the company's control[181] - The company specifically highlights the uncertainty around new U.S. tariffs on imports from China and other countries, and potential retaliatory measures, which could adversely affect its business, results of operations, and financial condition[182] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its stock repurchase program, authorized on February 8, 2011, under which 19,000 shares of common stock were repurchased on the open market during the three months ended June 30, 2025 Share Repurchases for the Quarter Ended June 30, 2025 | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | April 2025 | 0 | $ - | | May 2025 | 3,300 | $15.07 | | June 2025 | 15,700 | $12.83 | | Total | 19,000 | $13.95 | - As of June 30, 2025, a maximum of 291,854 shares may still be purchased under the existing repurchase plan[185] Item 5. Other Information During the quarter ended June 30, 2025, no director or officer adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No director or officer of the Company made changes to any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the third fiscal quarter of 2025[186] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications required by Sarbanes-Oxley Act, and financial statements in XBRL format - Exhibits filed include Rule 13(a)-14(a) / 15d-14(a) certifications for the CEO and CFO[187] - Section 1350 certifications for the CEO and CFO are also included[189] - The financial statements and notes are provided in eXtensible Business Reporting Language (XBRL) format[193]