CSP (CSPI) - 2023 Q4 - Annual Report

Part I Business CSP Inc. operates through Technology Solutions (TS) for IT integration and High Performance Products (HPP) for cybersecurity and network solutions, with TS accounting for 89% of fiscal 2023 sales - The company operates in two primary segments: Technology Solutions (TS), which provides IT integration and managed services, and High Performance Products (HPP), which develops and sells cybersecurity and network products[4] Sales by Operating Segment (Fiscal Years 2023 vs. 2022) | Segment | 2023 Sales (in thousands) | 2023 % of Total | 2022 Sales (in thousands) | 2022 % of Total | | :--- | :--- | :--- | :--- | :--- | | TS | $57,774 | 89% | $50,518 | 93% | | HPP | $6,873 | 11% | $3,843 | 7% | | Total Sales | $64,647 | 100% | $54,361 | 100% | - The TS segment's backlog decreased significantly from $18.2 million in FY2022 to $7.5 million in FY2023, attributed to the easing of prior-year supply chain issues[41] - The HPP segment's backlog also decreased from $5.0 million in FY2022 to $1.8 million in FY2023, with fluctuations driven by the timing of large government-related orders[439] - As of September 30, 2023, the company had approximately 112 full-time equivalent employees worldwide, none of whom are represented by a labor union[355] Risk Factors The company faces key risks including customer and government contract dependence, sole-source supplier reliance, intense competition, and intellectual property protection challenges - The company is reliant on a small number of significant customers; in fiscal 2022, one customer accounted for 19% ($10.4 million) of total revenues, though no single customer reached the 10% threshold in fiscal 2023[25] - The HPP segment depends on sole-source suppliers like NVIDIA for critical components, where any disruption could materially adversely affect business operations[28] - A portion of revenue comes from contracts with the U.S. federal government, primarily the Department of Defense (DoD), accounting for 5% of total revenue as a subcontractor in FY2023, making changes in government budgetary priorities a significant risk[56][449] - The company has made significant investments in its ARIA SDS cybersecurity products, and their commercial success is not guaranteed, with failure to achieve expected returns potentially unfavorably affecting revenue and profitability[26] - The company's stock price is subject to volatility due to factors such as loss of major customers or suppliers, variations in quarterly results, and broader market fluctuations[88][89] Properties As of September 30, 2023, the company's principal facilities, including its corporate headquarters and manufacturing site, are all leased Principal Leased Facilities | Location | Principal Use | Approximate Floor Area | | :--- | :--- | :--- | | Lowell, MA | Corporate HQ, Manufacturing, Sales, Admin | 8,257 S.F. | | Center Drive, 33442 | Division HQ, Sales, Marketing, Admin | 11,815 S.F. | | Mulberry Business Park, UK | Sales, Marketing, Admin | 484 S.F. | Legal Proceedings The company reports that it is not currently a party to any material legal proceedings - As of the report date, the company is not involved in any material legal proceedings[91] Mine Safety Disclosures This item is not applicable to the company's operations - Not Applicable[92] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under CSPI, with quarterly cash dividends paid in fiscal 2023 and approximately 1,891 beneficial owners as of December 6, 2023 Quarterly Common Stock Price Range (Nasdaq) | Fiscal Quarter | 2023 High | 2023 Low | 2022 High | 2022 Low | | :--- | :--- | :--- | :--- | :--- | | 1st Quarter | $9.45 | $7.01 | $9.30 | $8.09 | | 2nd Quarter | $13.59 | $9.43 | $8.94 | $6.99 | | 3rd Quarter | $14.80 | $10.50 | $9.68 | $6.81 | | 4th Quarter | $23.59 | $10.15 | $8.95 | $7.12 | Cash Dividends Paid Per Share | Fiscal Year | Payment Date | Amount Per Share | | :--- | :--- | :--- | | 2022 | 9/9/2022 | $0.03 | | 2023 | 1/6/2023 | $0.03 | | 2023 | 3/14/2023 | $0.03 | | 2023 | 6/13/2023 | $0.04 | | 2023 | 9/12/2023 | $0.04 | - As of December 6, 2023, the company had approximately 63 holders of record and an estimated 1,891 beneficial owners of its common stock[94] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2023, revenue increased 19% to $64.6 million, operating income improved to $1.8 million, and net income rose significantly to $5.2 million, supported by an Employee Retention Tax Credit and a tax benefit from valuation allowance release Results of Operations Fiscal 2023 revenue grew by $10.2 million (19%) year-over-year, driven by increased TS segment revenue and two major non-recurring HPP transactions, while overall gross margin slightly decreased Fiscal Year 2023 vs. 2022 Financial Highlights (in thousands) | Metric | FY 2023 | FY 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $64,647 | $54,361 | $10,286 | 19% | | Gross Profit | $21,920 | $18,827 | $3,093 | 16% | | Operating Income (Loss) | $1,870 | $(40) | $1,910 | N/A | | Net Income | $5,204 | $1,889 | $3,315 | 175% | - TS segment revenue increased by 14% ($7.3 million), driven by increased customer budgets as the economic environment returned to pre-pandemic levels and a significant decrease in order backlog due to fewer supply chain delays[120] - HPP segment revenue increased by 79% ($3.0 million), primarily due to two major non-recurring transactions totaling $3.0 million in fiscal 2023[102] - Other income increased to $2.9 million from $2.0 million, largely due to the recognition of a $2.1 million Employee Retention Tax Credit, net of costs[98][153] - The company recorded an income tax benefit of $469 thousand in FY2023, compared to a $50 thousand provision in FY2022, primarily driven by a $1.8 million benefit from the release of a valuation allowance against deferred tax assets[79][154] Liquidity and Capital Resources The company's liquidity remains strong, with cash and cash equivalents increasing to $25.2 million at fiscal year-end 2023, supported by $3.9 million in cash from operations - Cash and cash equivalents increased by $1.2 million, from $24.0 million at FYE 2022 to $25.2 million at FYE 2023[115] Summary of Cash Flows (in thousands) | Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net cash provided by Operating activities | $3,907 | $2,675 | | Net cash (used in) provided by Investing activities | $(341) | $20 | | Net cash (used in) provided by Financing activities | $(2,401) | $1,328 | - The company maintains a $15.0 million line of credit for inventory, with $13.5 million available as of September 30, 2023[159] - Dividends paid increased to $0.7 million in FY2023 from $0.1 million in FY2022, following a dividend increase to $0.04 per share in Q3 2023[158] Critical Accounting Estimates and Policies The company's critical accounting policies involve significant judgments and estimates in revenue recognition, valuation allowances for doubtful accounts and deferred tax assets, inventory valuation, and pension obligations - Significant judgment is required for revenue recognition, especially in allocating transaction prices for contracts with multiple components and determining whether to recognize third-party service revenue on a gross or net basis[164][146][148] - The company must make estimates regarding the valuation of deferred tax assets, which led to the reversal of a $1.8 million valuation allowance in FY2023 based on improved performance and future outlook[169][155] - Estimates for pension plan obligations rely on actuarial assumptions, including discount rates and expected long-term rates of return on plan assets, which can significantly impact pension expense[196] - Inventory is valued at the lower of cost or market, requiring management to estimate future demand and market conditions to assess potential obsolescence and apply write-downs[194] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal years ended September 30, 2023, and 2022, including the Report of Independent Registered Public Accounting Firm and various financial statements - This item includes the full set of consolidated financial statements and the report from the independent registered public accounting firm, RSM US LLP[174] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - There were no disagreements with accountants on any matter of accounting principles or practices, or financial statement disclosure[175][200] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023, and management assessed internal control over financial reporting as effective with no material changes during the fiscal year - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[176] - Management's assessment, based on the COSO 2013 framework, concluded that the company's internal control over financial reporting was effective as of September 30, 2023[202] - No changes in internal control over financial reporting occurred during fiscal year 2023 that have materially affected, or are reasonably likely to materially affect, these controls[205] Other Information The company reports that no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the fourth quarter of fiscal 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement in the three months ended September 30, 2023[206] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the company's Schedule 14A Proxy Statement for the 2024 Annual Meeting of Stockholders[182] Executive Compensation Information concerning the compensation of executive officers and non-employee directors is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the company's Schedule 14A Proxy Statement for the 2024 Annual Meeting of Stockholders[183] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on securities authorized for issuance under equity compensation plans, with 295,076 securities to be issued upon exercise of outstanding rights and 514,939 remaining available for future issuance as of September 30, 2023 Equity Compensation Plan Information (as of Sept 30, 2023) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity plans approved by security holders | 295,076 | $ — | 514,939 | - Additional information regarding security ownership is incorporated by reference from the company's Schedule 14A Proxy Statement[234] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the company's Schedule 14A Proxy Statement for the 2024 Annual Meeting of Stockholders[210][235] Principal Accountant Fees and Services Information concerning fees for professional services provided by the principal accountant and pre-approval policies is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the company's Schedule 14A Proxy Statement for the 2024 Annual Meeting of Stockholders[187][211] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, with consolidated financial statements included within the report and a detailed list of exhibits provided - This item lists the financial statements filed as part of the report, including the Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Shareholders' Equity, and Cash Flows[188][211][212] - A list of all exhibits filed with the Form 10-K is provided, including governance documents, compensation plans, material agreements, and required certifications under the Sarbanes-Oxley Act[238] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[216]