CSP (CSPI) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements Presents unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed notes Consolidated Balance Sheets Financial position as of March 31, 2021, and September 30, 2020, showing increased assets and equity from cash and receivables Consolidated Balance Sheets (Thousands) | Metric | March 31, 2021 (Thousands) | September 30, 2020 (Thousands) | |:---|:---|:---| | Total Assets | $59,420 | $53,645 | | Total Liabilities | $28,619 | $24,111 | | Total Shareholders' Equity | $30,801 | $29,534 | | Cash and Cash Equivalents | $20,397 | $19,264 | | Long-term Receivable | $7,818 | $3,642 | Consolidated Statements of Operations Net loss for three months, net income for six months ended March 31, 2021, influenced by sales, margins, and debt forgiveness Consolidated Statements of Operations (Thousands) | Metric (Thousands) | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | |:---|:---|:---|:---|:---| | Total Sales | $14,088 | $16,883 | $25,476 | $33,741 | | Gross Profit | $4,368 | $4,483 | $7,746 | $8,514 | | Operating Loss | $(121) | $(143) | $(658) | $(545) | | Net (Loss) Income | $(847) | $(732) | $304 | $(1,272) | | Net (Loss) Income per Share – Basic | $(0.20) | $(0.18) | $0.07 | $(0.32) | Consolidated Statements of Comprehensive Income (Loss) Reflects net income (loss) adjusted for foreign currency translation, showing comprehensive income for six months ended March 31, 2021 Consolidated Statements of Comprehensive Income (Loss) (Thousands) | Metric (Thousands) | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 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) | Consolidated Statement of Shareholders' Equity Details changes in equity components, showing an increase in total shareholders' equity for six months ended March 31, 2021 Consolidated Statement of Shareholders' Equity (Thousands) | Metric (Thousands) | Balance as of Sep 30, 2020 | Net Income (Loss) | Other Comprehensive Gain (Loss) | Stock-based Compensation | Restricted Stock Issuance | Employee Stock Purchase Plan | Balance as of Mar 31, 2021 | |:---|:---|:---|:---|:---|:---|:---|:---|\ | Common Stock | $43 | — | — | — | $1 | — | $44 | | Additional Paid-in Capital | $16,994 | — | — | $505 | — | $106 | $17,605 | | Retained Earnings | $24,492 | $304 | — | — | — | — | $24,796 | | Accumulated Other Comprehensive Loss | $(11,995) | — | $351 | — | — | — | $(11,644) | | Total Shareholders' Equity | $29,534 | $304 | $351 | $505 | $1 | $106 | $30,801 | Consolidated Statements of Cash Flows Shows a net increase in cash and cash equivalents for six months ended March 31, 2021, driven by operating activities Consolidated Statements of Cash Flows (Thousands) | Metric (Thousands) | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | |:---|:---|:---|\ | Net Cash Provided by (Used in) Operating Activities | $1,812 | $(1,861) | | Net Cash Used in Investing Activities | $(113) | $(384) | | Net Cash Used in Financing Activities | $(613) | $(753) | | Net Increase (Decrease) in Cash and Cash Equivalents | $1,133 | $(2,857) | | Cash and Cash Equivalents at End of Period | $20,397 | $15,242 | Notes to Unaudited Consolidated Financial Statements Provides detailed explanations and disclosures for unaudited financial statements, covering organization, policies, revenue, and segments Organization and Business CSPi operates in Technology Solutions and High Performance Products segments, offering IT integration, security, and computing solutions - CSPi operates in two segments: Technology Solutions (TS) and High Performance Products (HPP)[29] - The company develops and markets IT integration solutions, advanced security products, managed IT services, purpose-built network adapters, and high-performance cluster computer systems[29] Basis of Presentation Interim financial statements are unaudited, prepared by management, and should be read with the annual Form 10-K - Interim consolidated financial statements are unaudited and include all necessary normal recurring adjustments[30] - These statements should be read with the footnotes from the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020[31] Revision of Prior Period Financial Statements Prior period financial statements for fiscal year 2020 were revised to correct an immaterial revenue recognition error, reclassifying revenue - An immaterial error in revenue recognition for fiscal year 2020 was identified and corrected, reclassifying certain revenue from 'net' to 'gross' basis[32] - The revision affected 'Sales - Product', 'Sales - Services', and 'Cost of sales – product' but did not change 'Net income (loss)' or 'Gross profit'[32] Revised Sales and Cost of Sales for 3 and 6 Months Ended March 31, 2020 (Thousands) | Metric | 3 Months Ended Mar 31, 2020 (As Reported) | 3 Months Ended Mar 31, 2020 (Adjustment) | 3 Months Ended Mar 31, 2020 (As Revised) | 6 Months Ended Mar 31, 2020 (As Reported) | 6 Months Ended Mar 31, 2020 (Adjustment) | 6 Months Ended Mar 31, 2020 (As Revised) | |:---|:---|:---|:---|:---|:---|:---|\ | Sales: Product | $12,296 | $850 | $13,146 | $25,518 | $1,187 | $26,705 | | Sales: 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 | | 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 | Use of Estimates Financial statements rely on management estimates for bad debt, inventory, impairment, leases, revenue, compensation, and taxes - Management's estimates are crucial for financial statements, covering areas like bad debt, inventory obsolescence, intangible asset impairment, and revenue recognition[34] - Key estimates also include right-of-use assets and lease liabilities, deferred compensation and retirement plans, and income tax liabilities[34] Recent Accounting Pronouncements Adopted ASU 2018-14 with no material impact and is evaluating ASU 2016-13 on credit losses - ASU No. 2018-14, related to Defined Benefit Plans, was adopted in fiscal year 2021 with no material impact on interim financial statements[35] - The company is evaluating ASU 2016-13, Financial Instruments-Credit Losses, which will be effective for smaller reporting companies after December 15, 2022, and will change credit loss accounting[36] Revenue Revenue from hardware, software, and services is recognized point-in-time or over time, requiring judgment in allocation and principal/agent determination - Revenue sources include integrated hardware and software sales, third-party service contracts, professional services, managed IT services, and financing of hardware and software[37] - Revenue from hardware and software licenses is recognized at a point in time (typically upon shipment or license grant), while professional and managed services revenue is recognized over time as services are performed or over the contract term[37][38] - The company makes significant judgments in allocating transaction prices, especially for contracts combining products and non-managed services, and in determining whether it acts as a principal (gross revenue) or an agent (net revenue) for third-party service contracts[55][56] Disaggregated Sales by Segment and Geography (Three Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment/Geography | 2021 Sales | 2020 Sales | Change | |:---|:---|:---|:---|\ | HPP Segment | | | | | Product | $716 | $922 | $(206) | | Service | $172 | $553 | $(381) | | Total HPP | $888 | $1,475 | $(587) | | Technology Solutions Segment | | | | | United Kingdom | $331 | $268 | $63 | | U.S. | $12,869 | $15,140 | $(2,271) | | Total TS | $13,200 | $15,408 | $(2,208) | | Consolidated Total Sales | $14,088 | $16,883 | $(2,795) | | Geographic Area | | | | | Americas | $13,033 | $16,143 | $(3,110) | | Europe | $779 | $619 | $160 | | Asia | $276 | $121 | $155 | Disaggregated Sales by Segment and Geography (Six Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment/Geography | 2021 Sales | 2020 Sales | Change | |:---|:---|:---|:---|\ | HPP Segment | | | | | Product | $1,892 | $1,689 | $203 | | Service | $552 | $827 | $(275) | | Total HPP | $2,444 | $2,516 | $(72) | | Technology Solutions Segment | | | | | United Kingdom | $1,821 | $947 | $874 | | U.S. | $21,211 | $30,278 | $(9,067) | | Total TS | $23,032 | $31,225 | $(8,193) | | Consolidated Total Sales | $25,476 | $33,741 | $(8,265) | | Geographic Area | | | | | Americas | $22,783 | $32,268 | $(9,485) | | Europe | $2,320 | $1,282 | $1,038 | | Asia | $373 | $191 | $182 | Earnings Per Share of Common Stock EPS calculated using two-class method; anti-dilutive non-vested restricted stock excluded during net losses - EPS is presented using the two-class method due to outstanding non-vested share-based payment awards with non-forfeitable dividend rights[67] - Non-vested restricted stock awards were excluded from diluted loss per share calculations for periods with net losses because their inclusion would be anti-dilutive[67] Net (Loss) Income Per Share (Thousands, except per share data) | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | |:---|:---|:---|:---|:---|\ | Net (Loss) Income Attributable to Common Stockholders | $(847) | $(732) | $289 | $(1,272) | | Weighted Average Common Shares Outstanding – Basic | 4,158 | 4,036 | 4,117 | 3,999 | | Net (Loss) Income Per Share – Basic | $(0.20) | $(0.18) | $0.07 | $(0.32) | | Weighted Average Common Shares Outstanding – Diluted | 4,158 | 4,036 | 4,202 | 3,999 | | Net (Loss) Income Per Share – Diluted | $(0.20) | $(0.18) | $0.07 | $(0.32) | Accounts and Long-Term Receivable Long-term receivables increased to $13.7 million by March 31, 2021, due to new agreements, earning 4.8% average interest - Accounts and long-term receivables with payment terms exceeding one year totaled $13.7 million as of March 31, 2021, significantly increasing from $5.8 million as of September 30, 2020[68][74] - The increase is primarily due to two new multi-year agreements in Q2 fiscal year 2021, involving approximately $9.0 million in payments to be received over four years[68] - These receivables carry an average weighted interest rate of 4.8%, and interest income is recorded in Other income (expense), net[70][72] Interest Income from Long-Term Receivables (Thousands) | Period | Interest Income | |:---|:---|\ | 3 Months Ended Mar 31, 2021 | $126 | | 3 Months Ended Mar 31, 2020 | $114 | | 6 Months Ended Mar 31, 2021 | $218 | | 6 Months Ended Mar 31, 2020 | $230 | Inventories Inventories decreased to $4.2 million by March 31, 2021, from $5.3 million in September 2020, mainly due to finished goods reduction Inventories (Thousands) | Category | March 31, 2021 | September 30, 2020 | |:---|:---|:---|\ | Raw Materials | $890 | $574 | | Work-in-Process | $217 | $213 | | Finished Goods | $3,114 | $4,498 | | Total | $4,221 | $5,285 | Leases Lease costs remained stable, with operating leases being the primary cash outflow for lease liabilities, supplemented by sublease income Total Lease Costs, Net of Sublease Interest Income (Thousands) | Period | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | |:---|:---|:---|:---|:---|\ | Total Lease Costs, Net | $186 | $173 | $371 | $343 | Cash Paid for Lease Liabilities (Thousands) | Cash Flow Type | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | |:---|:---|:---|:---|:---|\ | Operating Cash Flows from Operating Leases | $185 | $191 | $376 | $379 | | Financing Cash Flows from Finance Leases | $87 | $79 | $173 | $157 | | Cash Received from Subleases | $112 | $112 | $225 | $225 | Accounts payable and other noncurrent liabilities TS segment entered $8.7 million multi-year vendor agreements in February 2021, classified as accounts payable and other noncurrent liabilities - The TS segment entered into two multi-year agreements with a vendor in February 2021, totaling approximately $8.7 million (including interest) for goods and services through fiscal year 2025[81][82] - An imputed interest rate of 5.0% was determined for these agreements, reflecting the rate the company could obtain from other financing sources[83] Amounts Owed for Vendor Agreements with Imputed Interest (Thousands) | Category | March 31, 2021 | |:---|:---|\ | Current (Accounts payable and accrued expenses) | $2,439 | | Noncurrent (Other noncurrent liabilities) | $5,187 | | Total | $7,626 | Notes Payable and Line of Credit PPP loans of $2.2 million were forgiven, and the company maintains a $15.0 million line of credit with $1.2 million borrowed - SBA Paycheck Protection Program (PPP) loans totaling $2.2 million were formally forgiven in November 2020, recognized as a gain on forgiveness of debt[88][90] - The company maintains a $15.0 million inventory line of credit, with $1.2 million borrowed as of March 31, 2021, and was in compliance with all financial covenants[91] Notes Payable (Thousands) | Category | March 31, 2021 | September 30, 2020 | |:---|:---|:---|\ | Current Portion | $739 | $1,613 | | Noncurrent Portion | $1,032 | $2,485 | | Total | $1,771 | $4,098 | Pension and Retirement Plans CSPi operates defined benefit and contribution plans, with U.K. assets diversified and U.S. plans funded by life insurance - The company provides defined benefit and defined contribution plans in the U.K. and U.S., with all defined benefit plans closed to new hires since September 2009[93] - The U.K. pension plan's assets consist of a diversified commingled fund, while U.S. supplemental retirement plans are funded by life insurance policies[93][95] Net Periodic Benefit Costs (Thousands) | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | 6 Months Ended Mar 31, 2021 | 6 Months Ended Mar 31, 2020 | |:---|:---|:---|:---|:---|\ | Pension: | | | | | | Net Periodic Benefit Cost | $12 | $47 | $23 | $94 | | Post Retirement: | | | | | | Net Periodic Cost | $35 | $26 | $70 | $54 | Income Taxes Income tax expense for three and six months ended March 31, 2021, driven by valuation allowance increase, offset by PPP tax benefit - Income tax expense for the three and six months ended March 31, 2021, was $723 thousand and $833 thousand, respectively[99] - The expense was primarily due to an increase in the valuation allowance against deferred tax assets, offset by a benefit from tax law changes allowing immediate deduction of PPP-covered expenses[99] Accumulated Other Comprehensive Loss Accumulated other comprehensive loss decreased to $(11.6) million by March 31, 2021, due to foreign currency translation Components of Accumulated Other Comprehensive Loss (Thousands) | Component | March 31, 2021 | September 30, 2020 | |:---|:---|:---|\ | Cumulative Effect of Foreign Currency Translation | $(4,345) | $(4,696) | | Cumulative Unrealized Loss on Pension Liability | $(7,299) | $(7,299) | | Accumulated Other Comprehensive Loss | $(11,644) | $(11,995) | Fair Value of Financial Assets and Liabilities Fair values for financial instruments are estimated using a three-level hierarchy, with cash as Level 1 and long-term receivables as Level 3 - Fair value is based on the exit price in an orderly transaction, categorized into a three-level hierarchy[101] - Cash and cash equivalents are classified as Level 1, while accounts and long-term receivables and certain accounts payable/other noncurrent liabilities with original maturities over one year are classified as Level 3[110] - Fair value for Level 3 instruments is estimated by discounting future cash flows based on current market rates for similar terms[111] Segment Information Operates in TS and HPP segments, both saw sales declines, with TS significantly impacted by budget cuts; Customer A remains major Segment Sales and Income (Loss) from Operations (Three Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment | 2021 Sales | 2020 Sales | 2021 Income (Loss) from Operations | 2020 Income (Loss) from Operations | |:---|:---|:---|:---|:---|\ | High Performance Products | $888 | $1,475 | $(1,339) | $(1,024) | | Technology Solutions | $13,200 | $15,408 | $1,218 | $881 | | Consolidated Total | $14,088 | $16,883 | $(121) | $(143) | Segment Sales and Income (Loss) from Operations (Six Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment | 2021 Sales | 2020 Sales | 2021 Income (Loss) from Operations | 2020 Income (Loss) from Operations | |:---|:---|:---|:---|:---|\ | High Performance Products | $2,444 | $2,516 | $(2,193) | $(2,287) | | Technology Solutions | $23,032 | $31,225 | $1,535 | $1,742 | | Consolidated Total | $25,476 | $33,741 | $(658) | $(545) | - Customer A accounted for 8% of total revenues for the three months and 7% for the six months ended March 31, 2021, and approximately 56% of total consolidated accounts receivable and long-term receivable as of March 31, 2021[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of financial condition and results, focusing on COVID-19 impact, critical accounting policies, and forward-looking statements Forward-Looking Statements Forward-looking statements are subject to risks including customer dependence, supply chain, competition, tax changes, and COVID-19 impact - Forward-looking statements are subject to significant risks and uncertainties, including dependence on a small number of customers and U.S. federal government contracts[121] - Other risks include reliance on single sources for key product components, intense competition, recent changes in U.S. Tax laws, and the impact of the COVID-19 pandemic[121] Critical Accounting Policies Financial statements rely on estimates and judgments for receivables, inventory, impairment, taxes, compensation, and revenue recognition - Critical accounting policies involve estimates and judgments for uncollectible receivables, inventory valuation, intangible asset impairment, income taxes, deferred compensation, and retirement plans[122] - Estimates for revenue recognition, including standalone selling prices and contingencies, are also critical[122] Observations on effects of novel coronavirus COVID-19 significantly impacted operations and revenue due to budget cuts and business challenges; full impact remains uncertain - The COVID-19 pandemic has adversely affected economies where the company operates, leading to government actions like social distancing and business limitations[123] - Company revenue decreased significantly for the three and six months ended March 31, 2021, primarily due to customers reducing their budgets and challenges in conducting one-on-one business[124] - The company has adopted flexible business practices, including remote work, but the scope and duration of the pandemic's impact on its business remain uncertain[124][127] Results of Operations Operations for three and six months ended March 31, 2021, show revenue decline, improved gross margins, persistent operating losses, and debt forgiveness gain Overview of the three months ended March 31, 2021 Revenues decreased by 17% to $14.1 million, gross margin percentage increased to 31%, resulting in a $(0.8) million net loss Key Financial Highlights (Three Months Ended March 31, 2021 vs. 2020) (Thousands) | Metric | 2021 Amount | 2021 % of Sales | 2020 Amount | 2020 % of Sales | |:---|:---|:---|:---|:---|\ | Sales | $14,088 | 100% | $16,883 | 100% | | Cost of Sales | $9,720 | 69% | $12,400 | 74% | | Operating Loss | $(121) | (1)% | $(143) | (1)% | | Other Income, (Expense) Net | $(3) | 0% | $580 | 3% | | Net Loss | $(847) | (6)% | $(732) | (5)% | - Revenues decreased by $2.8 million (17%) to $14.1 million, with TS segment down $2.2 million and HPP segment down $0.6 million[128] - Gross margin percentage increased to 31% from 27%, primarily due to the TS segment[128] Revenues Total revenues decreased by $2.8 million (17%), driven by declines in TS segment product sales and HPP segment Myricom sales and royalties - TS segment product revenues decreased by $2.0 million (16%) due to decreased sales to major customers in the U.S. division[131] - HPP segment product revenues decreased by $0.2 million (22%) due to lower Myricom product sales, and services revenues decreased by $0.4 million (69%) due to reduced royalties[132] - Revenues in the Americas decreased by $3.1 million (19%), while Europe and Asia saw increases of $0.2 million (26%) and $0.2 million (128%), respectively[133] Gross Margins Overall gross margin decreased by $0.1 million, but gross margin percentage increased to 31%, driven by TS segment pricing and HPP service revenue changes Gross Margin by Segment (Three Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment | 2021 GM$ | 2021 GM% | 2020 GM$ | 2020 GM% | Change in GM$ | Change in GM% | |:---|:---|:---|:---|:---|:---|:---|\ | TS | $3,885 | 29% | $3,656 | 24% | $229 | 5% | | HPP | $483 | 54% | $827 | 56% | $(344) | (2)% | | Total | $4,368 | 31% | $4,483 | 27% | $(115) | 4% | - TS segment product GM% increased to 20% from 15% due to significant pricing discounts from manufacturers[136] - HPP segment overall GM% decreased to 54% from 56%, attributed to decreased GM from services revenue, including a $0.3 million decrease in high-margin royalty revenues[137] Operating Expenses Operating expenses saw increased engineering costs for ARIA SDS, while SG&A decreased across segments due to lower payroll, travel, and stock compensation Engineering and Development Expenses HPP segment engineering and development expenses increased by $0.1 million to $0.8 million for ARIA SDS cybersecurity product development - Engineering and development expenses for the HPP segment increased by approximately $0.1 million to $0.8 million, primarily for ARIA SDS cyber security product development[138][140] Selling, General and Administrative Expenses Total SG&A expenses decreased by $0.2 million (5%) to $3.7 million, with reductions in both TS and HPP segments SG&A Expenses by Segment (Three Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment | 2021 Amount | 2021 % of Total | 2020 Amount | 2020 % of Total | Decrease | % Decrease | |:---|:---|:---|:---|:---|:---|:---|\ | TS segment | $2,667 | 72% | $2,775 | 71% | $(108) | (4)% | | HPP segment | $1,060 | 28% | $1,135 | 29% | $(75) | (7)% | | Total | $3,727 | 100% | $3,910 | 100% | $(183) | (5)% | Other Income/Expenses Total other income (expense), net, decreased by $0.6 million to $(3) thousand, primarily due to increased foreign exchange loss Other Income (Expense) (Three Months Ended March 31, 2021 vs. 2020) (Thousands) | Category | 2021 Amount | 2020 Amount | Increase (Decrease) | |:---|:---|:---|:---|\ | Interest Expense | $(75) | $(55) | $(20) | | Interest Income | $133 | $163 | $(30) | | Foreign Exchange (Loss) Gain | $(154) | $479 | $(633) | | Other Income (Expense), Net | $93 | $(7) | $100 | | Total Other Income (Expense), Net | $(3) | $580 | $(583) | - The $0.6 million increase in foreign exchange loss was mainly due to the weakening of the U.S. dollar and Euro relative to the British Pound, impacting the U.K. division's bank accounts[142] Income Taxes Income tax expense was $723 thousand, driven by valuation allowance increase, offset by PPP tax benefit, using a discrete effective tax rate - Income tax expense was $723 thousand, compared to $1.2 million in the prior year[144] - The expense was primarily due to an increased valuation allowance against deferred tax assets, offset by a tax benefit from PPP-covered expenses[144] - A discrete effective tax rate method was used for the quarter due to the inability to reliably estimate ordinary income[147] Overview of the six months ended March 31, 2021 Revenues decreased by 24% to $25.5 million, gross margin percentage improved to 30%, and net income of $0.3 million was boosted by debt forgiveness Key Financial Highlights (Six Months Ended March 31, 2021 vs. 2020) (Thousands) | Metric | 2021 Amount | 2021 % of Sales | 2020 Amount | 2020 % of Sales | |:---|:---|:---|:---|:---|\ | Sales | $25,476 | 100% | $33,741 | 100% | | Cost of Sales | $17,730 | 70% | $25,227 | 75% | | Operating Loss | $(658) | (3)% | $(545) | (2)% | | Other Income, (Expense) Net | $1,795 | 7% | $372 | 1% | | Net Income (Loss) | $304 | 1% | $(1,272) | (2)% | - Revenues decreased by $8.3 million (24%) to $25.5 million, primarily due to an $8.2 million decrease in the TS segment[148] - Gross margin percentage increased to 30% from 25%, but operating loss increased to $(0.7) million[148] - Net income of $0.3 million was achieved, largely due to a $2.2 million gain on forgiveness of PPP loans, partially offset by an increased foreign exchange loss[148] Revenues Total revenues decreased by $8.3 million (24%), primarily from TS segment U.S. product sales decline, partially offset by U.K. growth - TS segment product revenues decreased by $7.5 million (30%), primarily from an $8.4 million decrease in the U.S. division, partially offset by a $0.9 million increase in the U.K. division[153] - HPP segment product revenue increased by $0.2 million (12%) due to higher Multicomputer sales, but services revenue decreased by $0.3 million (33%) due to reduced repair revenue[154] - Americas revenues decreased by $9.5 million (29%), while Europe and Asia revenues increased by $1.0 million (81%) and $0.2 million (95%), respectively[155] Gross Margins Overall gross margin decreased by $0.8 million, but gross margin percentage increased to 30%, with both TS and HPP segments contributing to improvement Gross Margin by Segment (Six Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment | 2021 GM$ | 2021 GM% | 2020 GM$ | 2020 GM% | Change in GM$ | Change in GM% | |:---|:---|:---|:---|:---|:---|:---|\ | TS | $6,321 | 27% | $7,180 | 23% | $(859) | 4% | | HPP | $1,425 | 58% | $1,334 | 53% | $91 | 5% | | Total | $7,746 | 30% | $8,514 | 25% | $(768) | 5% | - TS segment product GM% increased by 3% due to significant pricing discounts, and services GM% increased by 1% due to increased managed services and third-party maintenance revenues[158] - HPP segment overall GM% increased by 5% due to product mix in both product and service revenue, combined with reduced manufacturing overhead expenses[159] Operating Expenses Engineering and development expenses increased slightly for ARIA SDS, while SG&A decreased by $0.8 million (10%) across both segments Engineering and Development Expenses Engineering and development expenses increased by $0.1 million to $1.5 million for ARIA SDS cybersecurity product development - Engineering and development expenses increased by $0.1 million to $1.5 million, primarily for the continued development of ARIA SDS cyber security products[160] Selling, General and Administrative Expenses Total SG&A expenses decreased by $0.8 million (10%) to $6.9 million, with reductions in both TS and HPP segments SG&A Expenses by Segment (Six Months Ended March 31, 2021 vs. 2020) (Thousands) | Segment | 2021 Amount | 2021 % of Total | 2020 Amount | 2020 % of Total | Decrease | % Decrease | |:---|:---|:---|:---|:---|:---|:---|\ | TS segment | $4,786 | 69% | $5,438 | 71% | $(652) | (12)% | | HPP segment | $2,127 | 31% | $2,233 | 29% | $(106) | (5)% | | Total | $6,913 | 100% | $7,671 | 100% | $(758) | (10)% | Other Income/Expenses Total other income (expense), net, increased by $1.4 million to $1.8 million, driven by $2.2 million debt forgiveness gain Other Income (Expense) (Six Months Ended March 31, 2021 vs. 2020) (Thousands) | Category | 2021 Amount | 2020 Amount | Increase (Decrease) | |:---|:---|:---|:---|\ | Interest Expense | $(113) | $(112) | $(1) | | Interest Income | $231 | $336 | $(105) | | Foreign Exchange (Loss) Gain | $(621) | $144 | $(765) | | Gain on Debt Forgiveness | $2,196 | $— | $2,196 | | Other Income, Net | $102 | $4 | $98 | | Total Other Income (Expense), Net | $1,795 | $372 | $1,423 | - The $2.2 million gain on debt forgiveness from PPP loans was the primary driver of the increase in other income[163] - An increase in foreign exchange loss of $0.8 million was due to the weakening of the U.S. dollar and Euro against the British Pound[163] Income Taxes Income tax expense was $833 thousand, driven by valuation allowance increase, offset by PPP tax benefit, using a discrete effective tax rate - Income tax expense was $833 thousand, compared to $1.1 million in the prior year[165] - The expense was primarily driven by an increased valuation allowance against deferred tax assets, offset by a tax benefit from PPP-covered expenses[165] - The company used a discrete effective tax rate method for the quarter due to the inability to reliably estimate ordinary income[168] Liquidity and Capital Resources Liquidity improved with cash increasing to $20.4 million, supported by accounts payable, deferred revenue, and inventory changes, with $15.0 million line of credit available - Cash and cash equivalents increased by $1.1 million to $20.4 million as of March 31, 2021[169] - Significant cash sources for the six months included increases in accounts payable ($1.7 million) and deferred revenue ($0.5 million), and a decrease in inventories ($1.0 million)[169] - The company maintains a $15.0 million inventory line of credit, with $13.8 million available as of March 31, 2021[171] - Management believes available cash, cash from SBA loans (forgiven), cash from operations, and the line of credit will be sufficient for working capital and capital expenditures for at least 12 months[175] Item 4. Controls and Procedures Disclosure controls were ineffective due to a material weakness in revenue recognition (principal vs. agent determination), with ongoing remediation efforts Evaluation of Disclosure Controls and Procedures Disclosure controls were ineffective due to an un-remediated material weakness in revenue recognition (principal vs. agent determination) - Disclosure controls and procedures were deemed ineffective as of March 31, 2021[177] - A material weakness was identified in internal controls over the revenue recognition process, specifically regarding the principal vs. agent determination[178] - Remediation efforts, including enhanced internal auditing procedures, have been implemented but the material weakness is not yet fully remediated[179] Changes in Internal Control over Financial Reporting Internal controls over financial reporting were redesigned for principal/agent classification, implementing enhanced review procedures - Controls around classifying the company as principal or agent in transactions have been redesigned and implemented to remediate the material weakness[180] - New enhanced procedures include reviewing every line item with additional levels of review from sales and financial management, moving away from reliance on keyword searches[181] PART II. OTHER INFORMATION This section provides other information, including risk factors, exhibits, and signatures Item 1A. Risk Factors No material changes to risk factors previously reported in the Annual Report on Form 10-K - No material changes to the risk factors previously reported in the Annual Report on Form 10-K for the fiscal year ended September 30, 2020[183] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and interactive data files Exhibits Filed | Number | Description | |:---|:---|\ | 31.1* | Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Executive Officer | | 31.2* | Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Financial Officer | | 32.1* | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer | | 101* | Interactive Data Files for Consolidated Financial Statements and Notes | SIGNATURES Report signed by Victor Dellovo (CEO) and Gary W. Levine (CFO) on May 13, 2021 - The report was signed by Victor Dellovo, CEO, President and Director, and Gary W. Levine, CFO, on May 13, 2021[186]