EDGAR 10-K Filing

Company CIK: 356037
Filing Year: 2021
Filename: 356037_10-K_2021_0000356037-21-000021.json

---

ITEM 1. BUSINESS
Item 1. Business
CSP Inc. ("CSPi" or "CSPI" or "the Company" or "we" or "our") was incorporated in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of our commercial and defense customers worldwide, CSPi and its subsidiaries develop and market IT integration solutions, advanced security products, managed IT services, cloud services, purpose built network adapters, and high-performance cluster computer systems.
Segments
CSPI operates in two segments: Technology Solutions ("TS") and High Performance Products ("HPP").
TS Segment
● The TS segment consists of our wholly-owned Modcomp subsidiary, which operates in the United States and the United Kingdom.
·
The TS segment generates product revenues by reselling third-party computer hardware and software as a value added reseller ("VAR"). The TS segment generates service revenues by the delivery of professional services for complex IT solutions, including advanced security; unified communications and collaboration; wireless and mobility; data center solutions; and network solutions as well as managed IT services ("MSP") that primarily serve the small and mid-sized business market ("SMB").
·
Third party products and professional services are marketed and sold through the Company’s direct sales force into a variety of vertical markets, including; automotive; defense; health care; education; federal, state and local government; and maritime.
● CSPi sold all stock of Modcomp GmbH to Reply AG on July 31, 2018 for $14.4 million cash and a gain of $18.1 million. This sale was recorded in fiscal year 2018. An additional €400 thousand was included in escrow as part of the Share Purchase and Assignment Agreement to potentially be received later as a purchase price adjustment in fiscal year 2021. This amount was received in July 2021 and recorded as a gain from discontinued operations in the Consolidated Statements of Operations. No income taxes were provided as the transaction was a tax-free exchange in the U.K. There are no other amounts that will be received as part of the agreement.
HPP Segment
● The HPP segment revenue comes from three distinct product lines: (i) a cybersecurity solution marketed as ARIA™ Software-Defined Security (“SDS”), which is offered to commercial, original equipment manufacturers ("OEM") and government customers; (ii) the Myricom® network adapters for commercial, government and OEM customers; and (iii) the legacy Multicomputer product portfolio for digital signal processing ("DSP") applications within the defense markets.
● The ARIA SDS solution is a software portfolio starting with an underlying platform, and hosted applications that reside on top, as well as supporting hardware then deployed in turn-key security deployments. All are developed to secure an organization’s network, enterprise-wide, to better protect critical devices, applications and high-value data, such as personally identifiable information ("PII"), from breaches. Revenue is derived from: (i) license sales of our software platform components, (ii) supporting hardware and (iii) any required support packages. The software licenses, as well as the support packages, are renewable on a recurring basis. The ARIA SDS platform and applications can also be deployed on our Myricom SmartNIC adapters which can be directly inserted into our customers servers or integrated as part of our turn-key appliances. Either of these approaches can be deployed into a customer’s data center environments or on-premise servers to provide network security services.
● The ARIA portfolio is of value to regulated industries, such as financial services or healthcare, due to the rise of data-privacy regulations enforced at the federal, U.S. state, and international level, as well as industry entities. Due to the COVID-19 pandemic and the dramatic increase in remote workforce, we believe ARIA SDS will provide additional protection against exploits entering in from home-based computers and networks. In addition, due to the complexities and high-costs associated with enterprise-wide security, particularly in the creation and operation of Security Operation Centers (“SOCs”), we believe that ARIA will be attractive to organizations that desire SOC level protections without incurring the procurement of disparate tools and the need to hire and retain highly-trained security analysts. We also believe the unique, patent-pending approach will be attractive to Managed Security Service Providers (“MSSPs”) and OEMs that pursue differentiated security services for their customers. While our initial offerings of the ARIA SDS portfolio are available now, we expect the number of offerings will continue to expand over time.
● There was limited revenue for ARIA SDS in fiscal 2021. This was primarily due to COVID-19 limiting our ability to access prospect’s data centers for trials and deployments; however, our customer pipeline recovered in the second half of FY 2021. As such, we saw an increase in recorded revenue from ARIA SDS during the second half of FY 2021.
● The Myricom SmartNIC adapters (“ARC Series” and Myricom Secure Intelligent Adapters or “SIA”) are optimized for and sold into markets that require high-bandwidth and low-latency including (i) packet capture, (ii) financial transactions, (iii) machine vision and (iv) network security. Our primary customers for packet capture include government agencies that need to capture, inject, and analyze network traffic at line rate, and OEMs selling into vendors of computer security appliances. Financial institutions, such as banks, and brokerage firms use Myricom adapters to decrease transaction times. Our machine vision customers, primarily in the manufacturing industry, use our adapters and software for high fidelity video capture and processing. Organizations across all verticals can benefit from the network monitoring software that allows threats to be found within network data at wire rate on our SmartNICs.
● Multicomputer products for DSP applications are no longer actively developed but will continue to be sold into established programs and supported for several years. Revenue flows come from servicing previously deployed products for a modest number of existing high-value defense customers. Therefore, the revenue from these products, as a percentage of overall Company revenue, is expected to decline over time.
Sales Information by Industry Segment
The following table details our sales by operating segment for fiscal years ending September 30, 2021 and 2020. Additional segment and geographical information are set forth in Note 18 Segment Information to the consolidated financial statements.
Segment
%
%
(Dollar amounts in thousands)
TS
$
44,585
%
$
55,917
%
HPP
4,623
%
5,876
%
Total Sales
$
49,208
%
$
61,793
%
TS Segment
Products and Services
Integration Solutions
The TS segment, is a value-added reseller ("VAR") of third-party hardware and software technology solutions along with our, advanced technology consulting, professional IT, managed IT and Cloud services. Our value proposition
is our ability to support the complete IT life cycle of planning, designing, implementing and optimizing a comprehensive solution into our customer’s IT environments, to help achieve their expected business outcomes.
Third-Party Hardware and Software
We sell third-party hardware, software, and information technology products, with a strategic focus on industry standard servers and data center infrastructure solutions, midrange data storage infrastructure products, networking and mobility products, unified communications, and advanced IT security hardware and software solutions. Our key offerings include products from Hewlett Packard (HPE)/Aruba, Cisco Systems, Palo Alto Networks, Nutanix, DellEMC, Juniper Networks, Citrix, Intel, VMWare, Fortinet, Microsoft and Barracuda. Through our business relationships with these vendors, we are able to offer competitively priced robust products to meet our diverse customers’ technology needs, providing procurement and engineering expertise in server infrastructure, storage, security, unified communications, mobility and networking, to the small-to-medium sized businesses ("SMBs") and large enterprise businesses ("LEBs") with unique and/or complex IT environments. Many of our SMB customers have unique technology needs and may lack technical purchasing expertise or have very limited IT engineering resources on staff. We offer our customers a single point of contact for complicated multi-vendor technology purchases. We also provide installation, integration, logistical assistance and other value-added services that customers may require. We target SMB and LEB customers across all industries. Our current customers are in web and infrastructure hosting, education, telecommunications, healthcare services, distribution, financial services, professional services and manufacturing.
Professional Services
We provide professional IT consulting services in the following areas:
● Assessments, planning, designing, implementation, migration, optimization services and project management.
● Hyper-Converged Infrastructure ("HCI"). We assist our clients with designing and implementing HCI solutions from multiple vendors including DellEMC, Nutanix, HPE and Cisco. HCI is a software-centric architecture that tightly integrates compute, storage and virtualization resources in a single system. The benefits of an HCI solution are improved performance, scalability and flexibility all in a reduced footprint.
● Virtualization. We help our customers implement virtualization solutions using products from companies such as VMWare, Nutanix and Citrix that allow one computer to do the job of multiple computers by sharing resources of a single computer across multiple environments. Virtualization eliminates physical and geographical limitations and enables users to host multiple operating systems and applications on fewer servers. Benefits include energy cost savings, lower capital expenditure requirements, high availability of resources, better desktop management, increased security and improved disaster recovery.
● Enterprise security intrusion prevention, network access control and unified threat management. Using third-party products from companies like Palo Alto, Aruba Networks, Juniper Networks, Fortinet, Barracuda and Cisco Systems, our services are designed to ensure data security and integrity through the establishment of virtual private networks, firewalls and other technologies.
● IT security compliance services. We provide services for IT security compliance with personal privacy laws such as the Payment Card Industry Data Security Standard ("PCI DSS"), the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), and internal control regulations under the Sarbanes-Oxley Act ("SOX").
● Unified communications, using Cisco Systems and Microsoft solutions. We are Cisco Premier Partner approved for its Cloud and Managed Services Program for Managed Business Communications and a Microsoft Gold Partner with specialties in Cloud, and Collaboration solutions.
● Wireless, routing, and switching solutions using Juniper Networks and Aruba Networks products and services.
● Custom software applications and solutions development and support. We develop custom applications to customer specifications using industry standard platforms such as Microsoft.Net, SharePoint and OnBase. We are a Microsoft Gold Partner.
● Managed IT services that include monitoring, reporting and management of alerts for the resolution and preventive general IT and IT security support tasks.
● Optimization, maintenance and technical support for third-party products including hardware and software, operating system and user support.
Managed IT and Cloud Services
As consumption models continue to evolve in our industry, we have developed a robust managed and cloud services portfolio to provide alternative solutions to traditional capital expenditure investments in IT solutions and IT operations for our clients. Our value is to provide an elastic offering that will allow the client to scale and consume these offerings with monthly billing options that help control costs and provide economies of scale.
We provide managed and cloud services in the following areas:
● Proactive monitoring and remote management of IT Infrastructure that includes network (both wired and wireless), data center (which includes compute, storage and virtualization), desktops, unified communications platforms and security.
● Managed and Hosted Unified Communication as a Service via a Cisco Communication and Collaboration solution under an annuity program.
● Managed Security (firewall, endpoint protection, malware, anti-virus Managed Detection & Response).
● Managed BackUp and Replication.
● Cloud services that include Microsoft 365, Azure, Azure Virtual Desktop, Greencloud, Amazon Web Services and Google Cloud Platform.
Markets and Marketing
We are an IT systems integrator and computer hardware and software VAR. We also provide technical services to achieve a value-add to our customers. We operate within the VAR sales channels of major computer hardware and software OEMs, primarily within the geographic areas of our sales offices and across the U.S. We provide innovative IT solutions, including a myriad of infrastructure products with customized professional IT consulting services and managed services to meet the unique requirements of our customers. We market the products and services we sell through sales offices in the U.S. and the U.K. using our direct sales force.
Competition
Our primary competition in the TS segment are other VARs ranging from small companies that number in the thousands, to large enterprises such as CDW, PC Connection, Insight, Presidio, Dimension Data, and Computacenter Limited. In addition, we compete directly with many of the companies that manufacture the third-party products we sell, including Cisco Systems, IBM, HPE, EMC (now part of Dell) and others. In the network management, security and storage systems integration services business, our competitors are extensive and vary to a certain degree in each of the geographical markets, but they also include such national competitors as HP/EDS, IBM and Cap Gemini.
Nearly all of our product offerings are available through other channels. Favorable competitive factors for the TS segment include procurement capability, product diversity which enables the delivery of complete and custom
solutions to our customers and the strength of our key business relationships with the major IT OEMs. We also consider our ability to meet the unique and/or specialized needs of the SMB and LEB markets and our strong knowledge of the IT products that we sell to be a key competitive advantage. Our ability to provide managed services through our network operations center and the professional IT services required to design and implement custom IT solutions to address our customers' IT needs are distinct competitive advantages. Unfavorable competitive factors include low name recognition, limited geographic coverage and pricing.
Sources and Availability of Product
COVID-19 has adversely affected the distribution channel leading to significantly longer lead times when the TS segment orders product. Manufacturers are not producing as much product as prior to the pandemic due to disruptions, resulting in supply shortages. Additionally, recent global shipping delays have exacerbated this problem. The TS segment has many vendors it transacts with, and supply shortages are pervasive with many of them.
Backlog
The gross backlog of customer orders and contracts for the TS segment was approximately $8.7 million at September 30, 2021, as compared to $4.3 million at September 30, 2020. Our backlog can fluctuate greatly. These fluctuations can be due to the timing of receiving large orders for third-party products and/or IT services. It is expected that all of the customer orders in backlog will ship and/or be provided during fiscal year 2022.
HPP Segment
Products and Services
The mission of the HPP team is to deliver a differentiated, smarter approach to cybersecurity. Our software-defined platform makes it easier for organizations to achieve enterprise-wide network security and protection of critical assets, applications and devices by improving their ability to find, stop, and prevent cyberattacks.
Markets and Marketing
Cyber Security Products Market
The ARIA SDS solution is targeted at organizations that need to get additional functionality out of their current cybersecurity solutions to find and stop attacks, while also reducing their operating costs. At the present time, our ARIA SDS solutions are primarily offered through our direct sales channel, however, we have begun to add channel partners such as independent resellers and MSSPs. These value added resellers will find the ARIA offerings an appealing way to expand their portfolio of security products and services while replacing less-effective tools and processes in their customer environments.
OEM vendors in the cybersecurity market can benefit from integrating the ARIA applications and leveraging them as internal solutions to allow their applications to scale, add critical functionality. OEMs are interested in the Myricom Adapters including our SIA SmartNIC running our ARIA SDS applications.
As mentioned, MSSPs require simple, yet differentiated, solutions that can be deployed across their customer bases. The detection, and automation capabilities found in ARIA SDS are valuable as they allow these security service providers to scale their offerings while increasing the productivity of their security operation center staff.
Aerospace & Defense Market
Our focus for fiscal 2022 and beyond is to continue our support of system deployments to be made by government entities.
Financial Transactions Market
Myricom network adapters with DBL application software address the need for the ultra-low latency required in the world of financial trading. Running DBL on the Myricom ARC Series provides acceleration for 10G Ethernet environments, with benchmarked application-to-application latency in the single digit microsecond range for Linux and Microsoft Windows operating systems.
Packet Capture Market
Myricom Sniffer10G software, running on Myricom ARC adapters, provides enterprise and government customers and partners the ability to capture, inject, and analyze network traffic at line rate, with low CPU overhead.
Machine Vision Market
Myricom ARC network adapters are used by OEMs for machine vision camera systems network applications, These OEM customers require the high-performance, low latency 10G attributions our solutions support.
Competition
CSPi’s competition in the cybersecurity space comes primarily from the large, traditional security vendors like Splunk, IBM, and McAfee. We also face competition from traditional network security solutions vendors such as Palo Alto and Cisco.
Manufacturing, Assembly and Testing
Currently, products are shipped to our customers directly from our plant in Lowell, Massachusetts. Our manufacturing activities consist mainly of final assembly and testing of printed circuit boards and systems that are designed by us and fabricated by outside third-party vendors.
Upon our receipt of material and components from outside suppliers, our quality assurance technicians inspect these products and components. During manufacture and assembly, both sub-assemblies and completed systems are subjected to extensive testing, including burn-in and environmental stress screening designed to minimize equipment failure at delivery and over the useful service life of the system. We also use diagnostic programs to detect and isolate potential component failures.
We provide a warranty covering defects arising from the sale of Multicomputer and Myricom products, which varies from 90 days to three years, depending upon the particular unit in question.
Sources and Availability of Raw Materials
Several components used in our HPP segment products are obtained from sole-source suppliers. We are dependent on key vendors such as Xilinx, NXP, NVIDIA and BCRM for a variety of processors for certain products. While we face the same supply chain risks as the rest of our competitors, we continue to work closely with our long term suppliers to meet our projected sales obligations.
COVID-19 has adversely affected manufacturers, which has led to production disruptions, resulting in supply shortages. Additionally, recent global shipping delays have exacerbated this problem.
Research and Development
For the year ended September 30, 2021, our expenses for R&D were approximately $2.9 million compared to approximately $2.8 million for the year ended September 30, 2020. Expenditures for R&D are expensed as they are incurred. Product development efforts in fiscal year 2021 and 2020 involved development of the ARIA SDS product set, and enhancements to our Myricom products. We expect to continue to make investments related to the development of new hardware adapter products and new cybersecurity software applications.
Intellectual Property
We rely on a combination of trademark and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights. We have pending patents for the ARIA SDS software and will be pursuing additional patent rights over time.
Backlog
The gross backlog of customer orders and contracts in the HPP segment was $4.3 million at September 30, 2021 as compared to $0.6 million at September 30, 2020. Our backlog can fluctuate greatly. We can experience possible large fluctuations due to the timing of receipt of large orders often for purchases from prime contractors for sales to the government. It is expected the customer orders in backlog will ship and/or be provided through fiscal year 2023.
Significant Customers
See Note 18 Segment Information in the notes to the consolidated financial statements for detailed information regarding customers which comprised more than 10% of consolidated revenues for the years ended September 30, 2021 and 2020.
Employees
As of September 30, 2021, we had approximately 112 full time equivalent employees worldwide for our consolidated operations. None of our employees are represented by a labor union and we have had no work stoppages in the last three fiscal years. We consider relations with our employees to be good.
Company Website
The United States Securities and Exchange Commission (“SEC”) maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company’s internet address is http://www.cspi.com. Through that address, the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available free of charge as soon as reasonably practicable after they are filed with the SEC. The information contained on the Company’s website is not included in, nor incorporated by reference into, this annual report on Form 10-K.
Financial Information about Geographic Areas
Information regarding our sales by geographic area and percentage of sales based on the location to which the products are shipped or services rendered are in Note 18 Segment Information of the notes to the consolidated financial statements.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
If any of the risks and uncertainties set forth below actually materialize, our business, financial condition and/or results of operations could be materially and adversely affected, the trading price of our common stock could decline and a stockholder could lose all or part of its, his or her investment. The risks and uncertainties set forth below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations.
Economic, Industry, and Operational Risks
We depend on a small number of customers for a significant portion of our revenue and loss of any customer could significantly affect our business.
Both the HPP and TS segments are reliant upon a small number of significant customers, and the loss of or significant reduction in sales to any one of which could have a material adverse effect on our business. For the fiscal year ended September 30, 2021, no one customer accounted for 10% or more of our total revenues for the fiscal year. For the fiscal year ended September 30, 2020, one customer accounted for 10% or more of our total revenues for the fiscal year. In addition, our revenues are largely dependent upon the ability of our customers to continue to grow or need services or to develop and sell products that incorporate our products. No assurance can be given that our customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our results of operations.
We depend on key personnel and skilled employees and face competition in hiring and retaining qualified employees.
We are largely dependent upon the skills and efforts of our senior management, managerial, sales and technical employees. None of our senior management personnel or other key employees are subject to any employment contracts except Victor Dellovo, our Chief Executive Officer and President. The loss of services of any of our executives or other key personnel could have a material adverse effect on our business, financial condition and results of operations. Our future success will depend to a significant extent on our ability to attract, train, motivate and retain highly skilled technical professionals. Our ability to maintain and renew existing engagements and obtain new business depends, in large part, on our ability to hire and retain technical personnel with the skills that keep pace with continuing changes in our industry standards and technologies. The inability to hire additional qualified personnel could impair our ability to satisfy or grow our client base. There can be no assurance that we will be successful in retaining current or future employees.
Our success depends in part on our timely introduction of new products and technologies and our results can be impacted by the effectiveness of our significant investments in new products and technologies
We have made significant investments in our ARIA SDS cyber security products and services that may not achieve expected returns. We will continue to make significant investments in research, development, and marketing for ARIA products, services, and technologies. Commercial success depends on many factors, including innovativeness, developer support, and effective distribution and marketing. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of new software and hardware products or upgrades, unfavorably affecting revenue. We may not achieve significant revenue from new product, service, and distribution channel investments for several years. New products and services may not be profitable, and even if they are profitable, operating margins for some new products and businesses may not be as high as the margins we have experienced historically. Developing new technologies and products is complex. It can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue.
To be successful, we must respond to the rapid changes in technology. If we are unable to do so on a timely basis our business could be materially adversely affected.
Our future success will depend in large part on our ability to enhance our current products and to develop new commercial products on a timely and cost-effective basis in order to respond to technological developments and changing customer needs. The design-in process is typically lengthy and expensive and there can be no assurance that we will be able to continue to meet the product specifications of our customers in a timely and adequate manner. In addition, if we fail to anticipate or to respond adequately to changes in technology and customer preferences, or if there is any significant delay in product developments or introductions, this could have a material adverse effect on our business, financial condition and results of operations, including the risk of inventory obsolescence. Because of the complexity of our products, we have experienced delays from time to time in completing products on a timely basis. If
we are unable to design, develop or introduce competitive new products on a timely basis, our future operating results would be adversely affected, particularly in our HPP segment. There can be no assurance that we will be successful in developing new products or enhancing our existing products on a timely or cost-effective basis, or that such new products or product enhancements will achieve market acceptance.
We rely on single sources for supply of certain components and our business may be seriously harmed if our supply of any of these components or other components is disrupted.
Several components used in our HPP products are currently obtained from sole-source suppliers. We are dependent on key vendors like Mellanox Technologies for our high-speed interconnect components. Generally, suppliers may terminate our purchase orders without cause upon 30 days’ notice and may cease offering products to us upon 180 days’ notice. Although we do not consider the risk of interruption of supply to be a significant risk in the near term, if in the future, our key vendors, such as Mellanox Technologies were to limit or reduce the sale of such components to us, or if these or other component suppliers, some of which are small companies, were to experience future financial difficulties or other problems which could prevent them from supplying the necessary components, such events could have a material adverse effect on our business, financial condition and results of operations. These sole source and other suppliers are each subject to quality and performance risks, materials shortages, excess demand, reduction in capacity and other factors that may disrupt the flow of goods to us or our customers, which thereby may adversely affect our business and customer relationships.
We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers will continue to meet our requirements. If our supply arrangements are interrupted, there can be no assurance that we would be able to find another supplier on a timely or satisfactory basis. Any shortage or interruption in the supply of any of the components used in our products, or the inability to procure these components from alternate sources on acceptable terms, could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that severe shortages of components will not occur in the future. Such shortages could increase the cost or delay the shipment of our products, which could have a material adverse effect on our business, financial condition and results of operations. Significant increases in the prices of these components would also materially adversely affect our financial performance since we may not be able to adjust product pricing to reflect the increase in component costs. We could incur set-up costs and delays in manufacturing should it become necessary to replace any key vendors due to work stoppages, shipping delays, financial difficulties, pandemics, government shutdowns or other factors and, under certain circumstances, these costs and delays could have a material adverse effect on our business, financial condition and results of operations.
Our international operation is subject to a number of risks.
We market and sell our products in certain international markets and we have established operations in the U.K. Foreign-based revenue is determined based on the location to which the product is shipped or services are rendered and represented 8% and 5% of our total revenue for the fiscal years ended September 30, 2021 and 2020, respectively. If revenues generated by foreign activities are not adequate to offset the expense of establishing and maintaining these foreign activities, our business, financial condition and results of operations could be materially adversely affected. In addition, there are certain risks inherent in transacting business internationally, such as changes in applicable laws and regulatory requirements, export and import restrictions, export controls relating to technology, tariffs and other trade barriers, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, expatriation controls and potential adverse tax consequences, any of which could adversely impact the success of our international activities. In particular, it is possible activity in the United Kingdom and the rest of Europe will be adversely impacted and that we will face increased regulatory and legal complexities, including those related to tax, trade, and employee relations as a result of Brexit. A portion of our revenues are from sales to foreign entities, including foreign governments, which are primarily paid in the form of foreign currencies. There can be no assurance that one or more of such factors will not have a material adverse effect on our future international activities and, consequently, on our business, financial condition or results of operations.
We face competition that could adversely affect our sales and profitability.
The markets for our products are highly competitive and are characterized by rapidly changing technology, frequent product performance improvements and evolving industry standards. Many of our competitors are substantially larger than we are and have greater access to capital and human resources and in many cases price their products and services less than ours. In addition, due to the rapidly changing nature of technology, new competitors may emerge. Competitors may be able to offer more attractive pricing or develop products that could offer performance features that are superior to our products, resulting in reduced demand for our products. Such competitors could have a negative impact on our ability to win future business opportunities. There can be no assurance that a new competitor will not attempt to penetrate the various markets for our products and services. Their entry into markets historically targeted by us could have a material adverse effect on our business, financial condition and results of operations.
Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (“COVID-19”), may materially adversely affect our business, results of operations, cash flows and financial condition.
Pandemics, epidemics, or disease outbreaks, such as COVID-19 may cause harm to us, our employees, our clients, our vendors and supply chain partners, and financial institutions, which could have a material adverse effect on our business, results of operations, cash flows, and financial condition. The impact of a pandemic, epidemic, or other disease outbreak, such as COVID-19, may include, but would not be limited to: (i) disruption to operations due to the unavailability of employees due to illness, quarantines, risk of illness, travel restrictions or factors that limit our existing or potential workforce; (ii) volatility in the demand for or availability of our products and services, (iii) inability to meet our customers’ needs due to disruptions in the manufacture, sourcing and distribution of our products and services, or (iv) failure of third parties on which we rely, including our suppliers, clients, and external business partners, to meet their obligations to us, or significant disruptions in their ability to do so. As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic on March 11, 2020, national, state, and local governments have taken actions such as declaring a state of emergency, social distancing guidelines, and shutting down certain businesses which are not considered essential in part or entirely. The Company has complied with such actions causing most employees to work remotely in all locations. Such measures could have a material adverse effect on our business, financial condition and results of operations.
Government Contracting Risks
We depend on contracts with the federal government, primarily with the Department of Defense ("DoD"), for a portion of our revenue, and our business could be seriously harmed if the government significantly decreased or ceased doing business with us.
We derived 4% of our total revenue in fiscal year 2021 and 6% of our total revenue in fiscal year 2020 from the DoD as a subcontractor. We expect that the DoD contracts will continue to be important to our business for the foreseeable future. If we were suspended or debarred from contracting with the federal government generally, the General Services Administration, or any significant agency in the intelligence community or the DoD, if our reputation or relationship with government agencies were to be impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially and adversely affected.
Our business could be adversely affected by changes in budgetary priorities of the federal government.
Because we derive a significant percentage of our revenue from contracts with the federal government, changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts.
In years when Congress does not complete its budget process before the end of its fiscal year (September 30), government operations are funded through a continuing resolution ("CR") that temporarily funds federal agencies. Recent CRs have generally provided funding at the levels provided in the previous fiscal year and have not authorized new spending initiatives. When the federal government operates under a CR, delays can occur in the procurement of products and services. Historically, such delays have not had a material effect on our business; however, should funding of the federal government by CR be prolonged or extended, it could have significant consequences to our business and our industry.
Additionally, our business could be seriously affected if changes in DoD priorities reduces the demand for our services on contracts supporting some operations and maintenance activities or if we experience an increase in set-asides for small businesses, which could result in our inability to compete directly for contracts.
U.S. Federal government contracts contain numerous provisions that are unfavorable to us.
U.S. Federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies, some of which are not typically found in commercial contracts, including allowing the government to:
● cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
● claim rights in systems and software developed by us;
● suspend or debar us from doing business with the federal government or with a governmental agency;
● impose fines and penalties and subject us to criminal prosecution; and
● control or prohibit the export of our data and technology.
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may be unable to recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated.
As is common with government contractors, we have experienced and continue to experience occasional performance issues under certain of our contracts. Depending upon the value of the matters affected, a performance problem that impacts our performance of a program or contract could cause our actual results to differ materially and adversely from those anticipated.
Intellectual Property and Systems Risks
We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitive advantage.
Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and unfair
competition laws. We cannot assure that our means of protecting our proprietary rights in the United States or abroad will be adequate, or that others will not develop technologies similar or superior to our technology or design around our proprietary rights. In addition, we may incur substantial costs in attempting to protect our proprietary rights.
Also, despite the steps taken by us to protect our proprietary rights, it may be possible for unauthorized third parties to copy or reverse-engineer aspects of our products develop similar technology independently or otherwise obtain and use information that we regard as proprietary and we may be unable to successfully identify or prosecute unauthorized uses of our technology. Furthermore, with respect to our issued patents and patent applications, we cannot assure that patents from any pending patent applications (or from any future patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents (and patent applications) and other proprietary rights held by us.
If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.
We may become subject to claims that we infringe the intellectual property rights of others in the future. We cannot assure that, if made, these claims will not be successful. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.
We need to continue to expend resources on research and development ("R&D") efforts in our HPP segment, to meet the needs of our customers. If we are unable to do so, our products could become less attractive to customers and our business could be materially adversely affected.
Our industry requires a continued investment in R&D. As a result of our need to maintain or increase our spending levels for R&D in this area and the difficulty in reducing costs associated with R&D, our operating results could be materially harmed if our revenues fall below expectations. In addition, as a result of CSPi’s commitment to invest in R&D, spending as a percent of revenues may fluctuate in the future. Further, if we fail to invest sufficiently in R&D or our R&D does not produce competitive results, our products may become less attractive to our customers or potential customers, which could materially harm our business and results of operations.
Our need for continued or increased investment in research and development may increase expenses and reduce our profitability.
Our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, our products could become less attractive to potential customers and our business and financial condition could be materially and adversely affected. As a result of the need to maintain or increase spending levels in this area and the difficulty in reducing costs associated with research and development, our operating results could be materially harmed if our research and development efforts fail to result in new products or if revenues fall below expectations. In addition, as a result of our commitment to invest in research and development, spending levels of research and development expenses as a percentage of revenues may fluctuate in the future.
Our results of operations are subject to fluctuation from period to period and may not be an accurate indication of future performance.
We have experienced fluctuations in operating results in large part due to the sale of products and services in relatively large dollar amounts to a relatively small number of customers. Customers specify delivery date requirements that coincide with their need for our products and services. Because these customers may use our products and services in connection with a variety of defense programs or other projects with different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer. As such, we have not been able in the past to consistently predict when our customers will place orders and request shipments so that we cannot always accurately plan our manufacturing, inventory, and working capital requirements. As a result, if orders and shipments
differ from what we predict, we may incur additional expenses and build excess inventory, which may require additional reserves and allowances and reduce our working capital and operational flexibility. Any significant change in our customers’ purchasing patterns could have a material adverse effect on our operating results and reported earnings per share for a particular quarter. Thus, results of operations in any period should not be considered indicative of the results to be expected for any future period.
Our quarterly results may be subject to fluctuations resulting from a number of other factors, including:
● delays in completion of internal product development projects;
● delays in shipping hardware and software;
● delays in acceptance testing by customers;
● a change in the mix of products sold to our served markets;
● changes in customer order patterns;
● production delays due to quality problems with outsourced components;
● inability to scale quick reaction capability products due to low product volume;
● shortages and costs of components;
● the timing of product line transitions;
● declines in quarterly revenues from previous generations of products following announcement of replacement products containing more advanced technology;
● inability to realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits;
● potential asset impairment, including goodwill and intangibles, write-off of deferred tax assets or restructuring charges; and
● changes in estimates of completion on fixed price service engagements.
In addition, from time to time, we have entered into contracts, referred to as development contracts, to engineer a specific solution based on modifications to standard products. Gross margins from development contract revenues are typically lower than gross margins from standard product revenues. We intend to continue to enter into development contracts and anticipate that the gross margins associated with development contract revenues will continue to be lower than gross margins from standard product sales.
Another factor contributing to fluctuations in our quarterly results is the fixed nature of expenditures on personnel, facilities and marketing programs. Expense levels for these programs are based, in significant part, on expectations of future revenues. If actual quarterly revenues are below management’s expectations, our results of operations will likely be adversely affected. Further, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and changes in estimates in subsequent periods could cause our results of operations to fluctuate.
If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
If we experience a local or regional disaster or other business continuity problem, such as a hurricane, earthquake, terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. As we attempt to grow our operations, the potential for particular types of natural or man-made disasters, political, economic or infrastructure instabilities, or other country- or region-specific business continuity risks increases.
If we suffer any data breaches involving the designs, schematics, or source code for our products or other sensitive information, our business and financial results could be adversely affected.
We securely store our designs, schematics, and source code for our products as they are created. A breach, whether physical, electronic or otherwise, of the systems on which this sensitive data is stored could lead to damage or piracy of our products. If we are subject to data security breaches from external sources or from an insider threat, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could adversely affect our business, financial condition, and results of operations. Other potential costs could include loss of brand value, incident response costs, loss of stock market value, regulatory inquiries, litigation, and management distraction. In addition, a security breach that involved classified information could subject us to civil or criminal penalties, loss of a government contract, loss of access to classified information, or debarment as a government contractor. Similarly, a breach that involved loss of customer-provided data could subject us to loss of a customer, loss of a contract, litigation costs and legal damages, and reputational harm.
Systems failures may disrupt our business and have an adverse effect on our results of operations.
Any systems failures, including network, software or hardware failures, whether caused by us, a third party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortages or terrorist attacks, could cause loss of data or interruptions or delays in our business or that of our clients and reputational harm as a security provider. Like other companies, we have experienced cyber security threats to our data and systems, our company sensitive information, and our information technology infrastructure, including malware and computer virus attacks, unauthorized access, systems failures and temporary disruptions. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. Prior cyber attacks directed at us have not had a material adverse impact on our business or our financial results, and we believe that our continuing commitment toward threat detection and mitigation processes and procedures will help us minimize or avoid such impact in the future. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
In addition, the failure or disruption of our email, communications or utilities could cause us to interrupt or suspend our operations or otherwise harm our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated.
The systems and networks that we maintain for our clients, although highly redundant in their design, could also fail. If a system or network we maintain were to fail or experience service interruptions, we might experience loss of revenue or face claims for damages or contract termination. Our errors and omissions liability insurance may be inadequate to compensate us for all the damages that we might incur and, as a result, our actual results could differ materially and adversely from those anticipated.
Legal and Regulatory Risks.
Changes in regulations could materially adversely affect us.
Our business, results of operations, or financial condition could be materially adversely affected if laws, regulations, or standards relating to us or our products are newly implemented or changed. In addition, our compliance with existing regulations may have a material adverse impact on us. Under applicable federal securities laws, we are required to evaluate and determine the effectiveness of our internal control structure and procedures. If we have a material weakness in our internal controls, our results of operations or financial condition may be materially adversely affected, or our stock price may decline.
Risks Related to Ownership of Our Common Stock
Our stock price may continue to be volatile
Historically, the market for technology stocks has been extremely volatile. Our common stock has experienced and may continue to experience substantial price volatility. The following factors could cause the market price of our common stock to fluctuate significantly:
● loss of a major customer;
● loss of a major supplier;
● the addition or departure of key personnel;
● variations in our quarterly operating results;
● announcements by us or our competitors of significant contracts, new products or product enhancements;
● acquisitions, distribution partnerships, joint ventures or capital commitments;
● regulatory changes;
● sales of our common stock or other securities in the future;
● changes in market valuations of technology companies; and
● fluctuations in stock market prices and volumes.
In addition, the stock market in general and the NASDAQ Global Market and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such companies. If any shareholders were to issue a lawsuit, we could incur substantial costs defending the lawsuit and the attention of management could be diverted.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS

---

ITEM 2. PROPERTIES
Item 2. Properties
Listed below are our principal facilities as of September 30, 2021. Management considers all facilities listed below to be suitable for the purpose(s) for which they are used, including manufacturing, research and development, sales, marketing, service and administration.
Owned
or
Approximate
Location
Principal Use
Leased
Floor Area
TS Segment Properties:
Modcomp, Inc.
Division Headquarters
Leased
11,815 S.F.
1182 East Newport Center Drive
Sales, Marketing and
Deerfield Beach, FL 33442
Administration
Modcomp, Ltd.
Sales, Marketing and
Leased
484 S.F.
Indigo House, Mulberry Business Park
Administration
Wokingham, Berkshire RG41 2GY
United Kingdom
HPP Segment Properties:
CSP Inc.
Corporate Headquarters
Leased
13,515 S.F.
175 Cabot Street, Suite 210
Manufacturing, Sales,
Lowell, MA 01854
Marketing and
Administration

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market information. Our common stock is traded on the Nasdaq Global Market under the symbol CSPI. The following table provides the high and low sales prices of our common stock as reported on the Nasdaq Global Market for the periods indicated.
Fiscal Year:
High
Low
High
Low
1st Quarter
$
8.71
$
7.09
$
13.60
$
12.01
2nd Quarter
$
12.76
$
7.96
$
14.52
$
5.00
3rd Quarter
$
11.60
$
8.47
$
11.40
$
6.21
4th Quarter
$
10.85
$
8.70
$
9.85
$
7.40
Stockholders. We had approximately 67 holders of record of our common stock as of December 6, 2021. This number does not include stockholders for whom shares were held in a “nominee” or “street” name. We believe the
number of beneficial owners of our shares of common stock (including shares held in street name) at that date was approximately 1,388.
Dividends. As of May 14, 2020, we suspended our stock repurchase program and the payment of quarterly cash dividends until further economic clarity. There were no dividends paid in fiscal year 2021. For the fiscal year ended September 30, 2020 the Company paid cash dividends as follows:
Amount Paid
Fiscal Year
Date Declared
Record Date
Date Paid
Per Share
12/10/2019
12/31/2019
1/15/2020
$
0.15
2/12/2020
2/28/2020
3/13/2020
$
0.15

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations and other portions of this filing contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information. You should review the “Special Note Regarding Forward Looking Statements” and “Risk Factors” sections of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The following discussion should be read in conjunction with our financial statements and the related notes included elsewhere in this filing.
Observations on effects of novel coronavirus (COVID-19)
On March 11, 2020, the World Health Organization characterized the novel coronavirus outbreak as a pandemic. The outbreak has and continues to adversely affect the economies of the U.S., U.K., and other international markets and economies in which we operate. As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic, national, state, and local governments have and continue to take actions such as declaring states of emergency, implementing social distancing and other guidelines, and shutting down and/or limiting the opening or operation of certain businesses which are not considered essential.
In these times of pandemic, our top priorities are to protect the health, well-being, and safety of our employees and partners, while still focusing on the key drivers of our business. To that end, and to insure we continue to operate safety and cautiously while also meeting our public health responsibilities, the Company has adopted flexible business practices including allowing most employees to work remotely in all locations. Our sales decreased significantly for the year ended September 30, 2021, which we believe is primarily due to the pandemic. This is largely the result of customers reducing their budgets. The pandemic has also had an adverse effect on our ability to transact one-on-one business, which we believe is important when rolling out new IT and security products.
During fiscal year 2021 COVID-19 has adversely affected the distribution channel leading to significantly longer lead times when ordering product. Manufacturers are not producing as much product as prior to the pandemic due to disruptions, resulting in supply shortages. Additionally, recent global shipping delays have exacerbated this problem. The TS segment has many vendors it transacts with and supply shortages are pervasive with many of them. The HPP segment has also experienced shortages with their vendors as well. Related to the supply shortage and potentially inflation, we have experienced price increases for our products, which we try to pass on to the customer.
We recognize the pandemic has created a dynamic and uncertain situation in the national economy, and we continue to closely monitor the latest information to make timely, informed business decisions and public disclosures regarding the potential impact of the pandemic on our operations. Despite reduced infection rates and ever-increasing vaccination rates in the United States, many nations and certain pockets within the United States are still battling various
strains/variants of the novel coronavirus, creating ongoing uncertainties as to when economies will return to business as usual and what that will look like, what regulatory measures or voluntary actions will be further implemented to limit the spread of COVID-19 and its variants and the duration of any such measures. The extent, severity and impact of any further spread of COVID-19 variants or resurgence of COVID-19 in a given geographic region after it has hit its “peak,” and the extent to which herd immunity will be achieved through the vaccination process is still uncertain. In summary, the scope of this pandemic and its effects are unprecedented, and we cannot at this time make a reasonable estimate on the extent or duration of the impacts on our business.
Please refer to Item 1A Risk Factors located in Part I in this Annual Report on Form 10-K for discussion of the risks related to COVID-19 on our business, financial condition, and results of operations.
Overview of Fiscal 2021 Results of Operations
Revenue decreased by approximately $12.6 million, or 20%, to $49.2 million for the fiscal year ended September 30, 2021 versus $61.8 million for the fiscal year ended September 30, 2020.
Gross profit margin percentage increased, from 28% of revenues for the fiscal year ended September 30, 2020 to 33% for the fiscal year ended September 30, 2021.
We generated an operating loss of approximately $1.4 million for the fiscal year ended September 30, 2021 as compared to an operating loss of approximately $1.4 million for the fiscal year ended September 30, 2020.
Other income, (expense) net was $2.0 million for the fiscal year ended September 30, 2021 as compared to $0.4 million for the prior year. The increase of $1.6 million from prior year is due to a large one time gain on debt forgiveness of $2.2 million which did not occur in the prior year, partially offset by an increase in foreign exchange loss of $0.5 million and increase of interest expense of $0.1 million.
A one-time gain of $465k occurred in fiscal year 2021, which was a purchase price adjustment of a subsidiary (Modcomp GmbH) that was sold in fiscal year 2018. This is classified as discontinued operations. There are no further amounts to be received in connection with the purchase agreement from the original sale.
The Company recorded an income tax provision of approximately $444 thousand, which reflected an effective tax rate of 39%, for the year ended September 30, 2021. The provision is primarily driven by the recording of a full valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by the exclusion of income from the forgiveness of Paycheck Protection Program loans, the exclusion of the gain of the discontinued German entity under UK tax law, current year federal research and development credits, and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.
The following table details our results of operations in dollars and as a percentage of sales for the fiscal years ended:
%
%
September 30, 2021
of sales
September 30, 2020
of sales
(Dollar amounts in thousands)
Sales
$
49,208
%
$
61,793
%
Costs and expenses:
Cost of sales
33,059
%
44,626
%
Engineering and development
2,887
%
2,798
%
Selling, general and administrative
14,624
%
15,793
%
Total costs and expenses
50,570
%
63,217
%
Operating loss
(1,362)
(3)
%
(1,424)
(2)
%
Other income, (expense) net
2,040
%
-
%
Income (loss) before income taxes
%
(1,062)
(2)
%
Income tax expense
%
-
%
Net income (loss) from continuing operations
-
%
(1,446)
(2)
%
Gain on sale of discontinued operations
%
-
-
%
Net income (loss)
$
%
$
(1,446)
(2)
%
Revenues
Revenue decreased by approximately $12.6 million, or 20%, to $49.2 million for the fiscal year ended September 30, 2021 versus $61.8 million for the fiscal year ended September 30, 2020. Our TS segment revenue decreased by approximately $11.3 million consisting of a decrease of $11.9 million in our U.S. division, partially offset by an increase of $0.6 million in our U.K. division. Our HPP segment revenue decreased by approximately $1.3 million, or 21%, primarily due to decreased product revenue of $0.3 million combined with decreased service revenue of $1.0 million.
TS segment revenue changes by products and services for the fiscal years ended September 30 were as follows:
Increase (decrease)
$
%
(Dollar amounts in thousands)
Products
$
32,100
$
44,588
$
(12,488)
(28)
%
Services
12,485
11,329
1,156
%
Total
$
44,585
$
55,917
$
(11,332)
(20)
%
The decrease in TS segment product revenue of $12.5 million during the period was the result of a $13.1 million decrease in the U.S. division, partially offset by an increase of $0.6 million in the U.K. division. Customers’ budgets have been cut or put on hold in the short term due to the pandemic leading to significantly decreased sales. The decrease in our U.S. division product revenue year over year was primarily associated with several major customers, partially offset by a significant increase with several other customers. The increase in the U.K. division year over year was primarily associated with an increase with one major customer. The increase in TS segment service revenue of $1.2 million as compared to the prior year was due to a $1.2 million increase in the U.S. division. In fiscal year 2021 as compared to the prior year, the U.S. division had an increase of $1.4 million in third party maintenance and an increase of $0.8 million in managed services, partially offset by a decrease of $1.0 million in internal and third party services revenue.
HPP segment revenue changes by product and services for the fiscal years ended September 30 were as follows:
Decrease
$
%
(Dollar amounts in thousands)
Products
$
3,126
$
3,401
$
(275)
(8)
%
Services
1,497
2,475
(978)
(40)
%
Total
$
4,623
$
5,876
$
(1,253)
(21)
%
The decrease in HPP product revenue of $0.3 million in the fiscal year ended September 30, 2021 was primarily the result of an approximately $0.6 million decrease in Myricom product line shipments, partially offset with a $0.3 million increase in Multicomputer product line shipments for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020. This is primarily due to the pandemic affecting customers’ budgets. The decrease in HPP service revenue of approximately $1.0 million for the period was primarily the result of a $0.6 million decrease in royalty revenues on high-speed processing boards related to the E2D program combined with a $0.4 million decrease of Multicomputer repairs for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020.
Our total revenues by geographic area based on the location to which the products were shipped or services rendered were as follows:
Increase (decrease)
%
%
$
%
(Dollar amounts in thousands)
Americas
$
45,321
%
$
59,178
%
$
(13,857)
(23)
%
Europe
3,203
%
2,282
%
%
Asia
%
%
%
Totals
$
49,208
%
$
61,793
%
$
(12,585)
(20)
%
The $13.9 million decrease in the Americas revenue for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020 was primarily due to decreased revenue by our TS segment of approximately $12.4 million attributable to the U.S. division, combined with decreased sales by our HPP segment of approximately $1.5 million. The $0.9 million increase in Europe revenue for the fiscal year ended September 30, 2021 as compared to the prior year period was primarily due to increased sales by our TS-UK division of approximately $0.6 million combined with an increase in sales by our TS-US division of approximately $0.3 million. The $0.4 million increase in Asia revenue for the fiscal year ended September 30, 2021 as compared to the prior year period was primarily the result of increased revenue by our HPP segment of $0.2 million combined with a $0.2 million increase in our TS-U.S. division.
Gross Margins
Our gross margin ("GM") decreased by approximately $1.1 million to $16.1 million for fiscal year 2021 as compared to GM of approximately $17.2 million for fiscal year 2020. The GM as a percentage of revenue increased to 33% for fiscal year 2021 from 28% for fiscal year 2020. The increase in GM as a percentage of revenue was primarily attributed to a higher percentage of service revenue relative to product revenue in the TS segment and a significant increase in TS segment product GM as a percentage of revenue. Additionally, the product mix, amount of net revenue recorded, and overall margin in products contributed to this increase from prior year. The improved product GM margin as a percentage of revenue has been a focus in fiscal year 2021, particularly in the TS segment.
The following table summarizes GM changes by segment for fiscal years ended September 30:
Increase (Decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
TS
$
13,405
%
$
13,553
%
$
(148)
%
HPP
2,744
%
3,614
%
(870)
(3)
%
Total
$
16,149
%
$
17,167
%
$
(1,018)
%
The impact of product mix within our TS segment on gross margins for the fiscal years ended September 30 was as follows:
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
(Dollar amounts in thousands)
Products
$
5,898
%
$
6,842
%
$
(944)
%
Services
7,507
%
6,711
%
%
Total
$
13,405
%
$
13,553
%
$
(148)
%
The overall TS segment GM as a percentage of revenue increased to 30% in fiscal year 2021 from 24% in fiscal year 2020. The increase in GM as a percentage of revenue was primarily attributed to a large relative decrease in TS segment product revenue compared to a significant increase in service revenue in fiscal year 2020 from the prior year. Additionally, both product and service GM as a percentage of revenue increased from prior year. The $0.9 million decrease in our TS segment product GM in fiscal year 2021 as compared to the prior year resulted from a decrease in GM in the U.S. division of $0.8 million combined with a decrease in the U.K division of $0.1 million. The $0.8 million increase in the TS segment service GM in fiscal year 2021 as compared to the prior year primarily resulted from increased service revenue as well as a slight increase in GM as a percentage of revenue in the U.S. division.
The impact of product mix on gross margins within our HPP segment for the fiscal years ended September 30 was as follows:
Increase (Decrease)
(Dollar amounts in thousands)
GM$
GM%
GM$
GM%
GM$
GM%
Products
$
1,304
%
$
1,240
%
$
%
Services
1,440
%
2,374
%
(934)
-
%
Total
$
2,744
%
$
3,614
%
$
(870)
(3)
%
The overall HPP segment GM as a percentage of revenue decreased to 59% in fiscal year 2021 from 62% in fiscal year 2020. The 3% decrease in GM as a percentage of sales in the HPP segment was primarily attributed to the impact of a decrease of $0.6 million in high margin Multicomputer royalty revenues, which is all GM. The GM as a percentage of sales from products increased primarily due to product mix in fiscal year 2021 as compared to the prior year.
Engineering and Development Expenses
Our engineering and development expenses are only in our HPP segment. These expenses had a slight increase of $0.1 million from $2.8 million in fiscal year 2020 to $2.9 million for fiscal year 2021. Fiscal year 2021 and 2020 expenses were primarily for product engineering expenses incurred in connection with the development of the ARIA SDS cyber security products.
Selling, General and Administrative
The following table details our selling, general and administrative (“SG&A”) expenses by operating segment for the years ended September 30, 2021 and 2020:
For the year ended September 30,
$
%
% of
% of
Decrease
Decrease
Total
Total
(Dollar amounts in thousands)
By Operating Segment:
TS segment
$
10,190
%
$
11,247
%
$
(1,057)
(9)
%
HPP segment
4,434
%
4,546
%
(112)
(2)
%
Total
$
14,624
%
$
15,793
%
$
(1,169)
(7)
%
For fiscal year 2021 compared to fiscal year 2020, the TS segment SG&A spending decrease of approximately $1.0 million was primarily due to a decrease in variable compensation and salaries of $1.0 million and a decrease of $0.1 million for travel expense.
For fiscal year 2021 compared to fiscal year 2020, the HPP segment SG&A spending decrease of $0.1 million was primarily attributed to decreased headcount in the sales department.
Other Income/Expenses
The following table details our other income (expenses) for the years ended September 30, 2021 and 2020:
For the year ended
$ Increase
September 30, 2021
September 30, 2020
(Decrease)
(Amounts in thousands)
Interest expense
$
(350)
$
(228)
$
(122)
Interest income
(7)
Foreign exchange (loss) gain
(488)
(2)
(486)
Gain on debt forgiveness
2,196
-
2,196
Other income, net
Total other income (expense), net
$
2,040
$
$
1,678
The $1.7 million increase to total other income (expense), net for the year ended September 30, 2021 as compared to the prior year period is primarily driven by a gain on debt forgiveness of $2.2 million, partially offset by an increase in foreign exchange loss of $0.5 million. The U.K. division has significant bank accounts with U.S. dollars and Euros. In consolidation, U.S. dollars and Euros are remeasured into the functional currency, British Pounds, of our U.K. subsidiary. This non-cash remeasurement is included in foreign exchange gain or loss on the income statement and the foreign exchange loss is primarily from a U.S. Dollar and Euro bank account. The US dollar and Euro weakened relative to the British Pound when comparing the exchange rate as of September 30, 2021 to September 30, 2020, which caused the foreign exchange loss.
Interest income is primarily related to agreements that have payment terms in excess of one year (see Note 3 Accounts and Long-Term Receivable in Item 1 to this Annual Report on Form 10-K for details) from the TS-US segment as interest income recognized in each agreement decreases as principal payments are made.
The interest expense increase of $122 thousand for the year ended September 30, 2021 as compared to the prior year period is related to three new multi-year agreements with vendors in the TS U.S. division in fiscal year 2021. Payments on these agreements contain both principal and interest expense. See Note 9 Accounts payable and accrued expenses, and Other noncurrent liabilities in Item 1 to this Annual Report on Form 10-K.
The other income increase of $97 thousand for the year ended September 30, 2021 as compared to the prior year period is primarily related to a nonrecurring rebate we received that originated several years ago, which we did not anticipate receiving.
Income Taxes
The Company recorded an income tax provision of approximately $444 thousand, which reflected an effective tax rate of 39%, for the year ended September 30, 2021. The provision is primarily driven by the recording of a full valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by the exclusion of income from the forgiveness of Paycheck Protection Program loans, the exclusion of the gain of the discontinued German entity under UK tax law, and current year federal R&D credits and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.
For the year ended September 30, 2020, the income tax provision was approximately $384 thousand, which reflected an effective tax rate of 36%. The provision is primarily driven by the recording of a partial valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by current year federal R&D credits and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.
During the period ended September 30, 2021, management assessed the positive and negative evidence in the U.S. operations, and concluded that it is more likely than not that the deferred tax assets as of September 30, 2021 will not be realized in light of recent results, the ongoing impacts of COVID-19, and the resulting economic fallout. In assessing the realizability of deferred tax assets, we consider taxable income in prior carryback years, as permitted under the tax law, our forecasted taxable earnings, tax planning strategies, and the expected timing of the reversal of temporary differences. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information and is performed on a jurisdiction-by-jurisdiction basis.
We also continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.
Gain on Discontinued Operations
CSPi sold all stock of Modcomp GmbH to Reply AG on July 31, 2018 for $14.4 million cash and a gain of $18.1 million. This sale was recorded in fiscal year 2018. An additional €400 thousand was included in escrow as part of the Share Purchase and Assignment Agreement to potentially be received later as a purchase price adjustment in fiscal year 2021. This amount was received in July 2021 and recorded as a gain from discontinued operations in the Consolidated Statements of Operations. No income taxes were provided as the transaction was a tax-free exchange in the U.K. There are no other amounts that will be received as part of the agreement.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which increased by approximately $0.7 million to $20.0 million as of September 30, 2021 from $19.3 million as of September 30, 2020.
Our significant sources of cash for the year ended September 30, 2021 are primarily related to the $1.5 million net change between a increase in accounts receivable and long-term receivable of $9.3 million netted with an increase of $10.8 million in accounts payable and accrued expenses, and other-long-term liabilities. We have multi-year agreements on both the receivables (including long-term) and payables (long-term portion in other long-term liabilities). During fiscal year 2021 we entered into agreements with customers, which contained a significant financing component totaling payments of $16.7 million including interest due to the Company over the next four years. It was determined we were acting as the agent in the transactions and recorded net revenue of approximately $0.9 million during fiscal year 2021
from these contracts. For some of these agreements, we entered into agreements with vendors to pay for product over the next 4 years. These payments totaled $9.2 million including interest. Additionally, deferred revenue increased $0.9 million primarily due to a large upfront payment we received for one managed services contract.
Our significant uses of cash for the year ended September 30, 2021 included repayments on debt of $0.8 million, net payments under the line-of-credit agreement of $0.6 million, and principal payments on finance leases of $0.3 million.
Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $10.0 million as of September 30, 2021, which consisted of 0.5 million Euros, 0.2 million British Pounds, and 9.2 million U.S. Dollars. This cash is included in our total cash and cash equivalents reported within our financial statements. Due to the large pension obligation in the U.K., we maintain a large balance of cash in the U.K., most of the cash is from the sale of Modcomp GmbH in fiscal year 2018.
As of September 30, 2021 and September 30, 2020, the Company maintained a line of credit with a capacity of up to $15.0 million for inventory accessible to both the HPP and TS segments. This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million. An amount of $14.1 million and $13.4 million were available as of September 30, 2021 and September 30, 2020, respectively. As of September 30, 2021 and September 30, 2020 there were no cash withdrawals outstanding. For a further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 12 Line of Credit.
On April 17, 2020, the Company and Modcomp, Inc., its wholly owned subsidiary each received a loan (“SBA Loans”) in the form of a promissory note from Paragon Bank in the amounts of $827,000 and $1,353,600, respectively under the Paycheck Protection Program, which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The SBA loans had a two-year term and carried an annual fixed interest rate of 1%. The SBA Loans were forgiven in full by the SBA in the first quarter of fiscal year 2021.
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition, retain key employees, or continue to effectively operate our business.
Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash received from the SBA loans, the cash generated from operations, and availability on our line of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least 12 months from the date of this filing.
Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, goodwill and intangibles, income taxes, deferred compensation, revenue recognition, retirement plans, restructuring costs and contingencies. We base our estimates on historical performance and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition, valuation allowances, specifically the
allowance for doubtful accounts and net deferred tax asset valuation allowance, inventory valuation, intangibles, and pension and retirement plans.
Revenue Recognition
See Note 1 Summary of Significant Accounting Policies, in the Consolidated Financial Statements for additional information regarding our revenue recognition policies. The following areas involve significant judgment and estimates:
Allocating transaction price with agreements with multiple components including leasing and/or a financing component
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, we have 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 remain 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.
Professional Services Sold Without Products
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 our performance toward satisfying a performance obligation are used to measure progress. An estimate of hours for each professional service agreement is made at the beginning of each contract based on prior experience and monitored throughout the performance of the services. This method is most appropriate as it depicts the measure of progress towards satisfaction of the performance obligation.
Gross versus Net Revenue
We recognize revenue from third-party service contracts as either gross sales or net sales depending on whether we are acting as a principal party to the transaction or acting as an agent or broker based on control and timing. We are a principal if we control the good or service before that good or service is transferred to the customer. We record revenue as gross when we are 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 sales. 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 we are an agent, revenue is typically recorded at a point in time. When we are 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.
Product Warranty Accrual
Our product sales generally include a 90-day to three-year hardware warranty. At time of product shipment, we accrue for the estimated cost to repair or replace potentially defective products. Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.
Engineering and Development Expenses
Engineering and development expenses include payroll, employee benefits, stock-based compensation and other headcount-related expenses associated with product development. Engineering and development expenses also include third-party development and programming costs. We consider technological feasibility for our software products to be reached upon the release of the software, accordingly, no internal software development costs have been capitalized.
Income Taxes
We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We also reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets will not be realized.
In addition, we are required to recognize in the consolidated financial statements, those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized.
In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become payable in the future.
Intangible Assets
Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if events or circumstances indicate that the asset may be impaired. We did not have intangible assets with indefinite lives at any time during the two years ended September 30, 2021. Intangible assets subject to amortization are amortized over their estimated useful lives, generally three to ten years, and are carried at net book value. The remaining useful lives of intangible assets are evaluated on an annual basis. Intangible assets subject to amortization are also tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the fair value of an intangible asset subject to amortization is determined to be less than its carrying value, then an impairment charge is recorded to write down that asset to its fair value.
Inventories
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing,
competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Pension and Retirement Plans
The funded status of pension and other post-retirement benefit plans is recognized prospectively on the consolidated balance sheet. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive loss, net of tax, until they are amortized as a component of net periodic pension/post-retirement benefits expense. Additionally, plan assets and obligations are measured as of our fiscal year-end balance sheet date (September 30).
We have defined benefit and defined contribution plans in the U.K. and in the U.S. In the U.K., the Company provides defined benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees. The defined benefit plans in the U.K. are closed to newly hired employees and have been for the two years ended September 30, 2021. In the U.S., the Company provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2021. These supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the defined benefit plans. In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain officers. The Company also funds these supplemental plans’ obligations through whole life insurance policies on the officers.
Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets, expected compensation increases and applicable discount rates. Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisers and concluded they were reasonable. A decrease in the expected return on pension assets would increase pension expense. Expected compensation increases are estimated based on historical and expected increases in the future. Increases in estimated compensation increases would result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit. A decrease in the discount rate would result in greater pension expense while an increase in the discount rate would decrease pension expense.
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.
Inflation and Changing Prices
Management does not believe that inflation and changing prices had significant impact on sales, revenues or income during fiscal years 2021 or 2020. However, we have seen a trend of significantly increasing prices, specifically with integrated circuit vendors. We try to pass these price increases to our customers, but certain economic factors and technological advances have placed downward pressure on pricing. There is no assurance that the Company’s business will not be materially and adversely affected by inflation and changing prices in the future.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements are included herein.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2021 and 2020
Consolidated Statements of Operations for the years ended September 30, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2021 and 2020
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020
Notes to Consolidated Financial Statements

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures
Disclosure Controls and Procedures. The Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of September 30, 2021. Our Chief Executive Officer, our Chief Financial Officer and other members of our senior management team supervised and participated in this evaluation. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s ("SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by or under the supervision of a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. It includes those policies and procedures that:
● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and the board of directors of a company; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on its financial statements.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021. In making its assessment of internal control, management used the criteria described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission. As a result of its assessment, management has concluded that the Company’s internal control over financial reporting was effective as of September 30, 2021.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021 was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that call for the Company to provide only management’s report in this Annual Report on Form 10-K.
Remediation of Previously Identified Material Weakness
As reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, management identified a material weaknesses in internal control over financial reporting in connection with internal controls over the revenue recognition process, specifically the failure to properly identify whether the Company was to be considered the principal or the agent in certain transactions, which determines whether revenue is recorded gross or net. 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 acting as an agent or broker based on control and timing of the goods/services. 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. 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 redesigned the control that failed, which was implemented the first month of fiscal year 2021. The redesigned control involves review by multiple employees in different departments of every item sold. As a result of the implementation of these processes and testing these processes for the entire year of fiscal year 2021, management has determined that the remediation actions discussed above were effectively designed and demonstrated effective operation for a sufficient period of time to enable the Company to conclude that the previously identified material weakness in internal control over financial reporting has been remediated as of September 30, 2021.
Changes in Internal Control over Financial Reporting.
Except as discussed above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with management’s evaluation during our fiscal year 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
We incorporate the information required by this item by reference to the sections captioned “Nominees for Election”, “Our Board of Directors”, “Our Executive Officers”, “Delinquent Section 16(a) reports” and “Corporate
Governance” in our Schedule 14A Proxy Statement for our 2022 Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2021.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
We incorporate the information required by this item by reference to the sections captioned “Compensation of Executive Officers” and “Compensation of Non-Employee Directors” in our Schedule 14A Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2021.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans.
The equity compensation plans approved by our stockholders consist of the CSP, Inc. 1997 Incentive Stock Option Plan, the 2003 Stock Incentive Plan, the 2007 Stock Incentive Plan, the 2014 Employee Stock Purchase Plan (the "ESPP") and the 2015 Stock Incentive Plan. In fiscal 2021 and 2020, the Company granted to certain key employees, certain officers including its Chief Executive Officer and non-employee directors’ shares of non-vested common stock instead of stock options. The non-vested common stock has a four-year vesting period for key employees, officers including the Chief Executive Officer. There is a one-year vesting period for the non-employee directors. The following table sets forth information as of September 30, 2021 regarding the total number of securities outstanding under these equity compensation plans.
(a) (1)(2)
(b)
(c)
Number of securities
remaining available for future
Number of securities to be
Weighted average
issuance under equity
issued upon exercise of
exercise price of outstanding
compensation plans (excluding
outstanding restricted stock awards,
outstanding restricted stock awards,
securities reflected in column
Plan Category
options, warrants and rights
options, warrants and rights
(a)(3)
Equity compensation plans approved by security holders
197,563
$
3.64
172,007
(1) Includes 197,063 non-vested shares issued and 500 stock options issued.
(2) Does not include purchase rights under the ESPP, as the purchase price and number of shares to be purchased under the ESPP are not determined until the end of the relevant purchase period.
(3) Includes 140,215 shares available for future issuance under the stock incentive and stock option plans and 31,792 under the ESPP.
We incorporate additional information required by this Item by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in our Schedule 14A Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2021.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Director Independence
We incorporate the information required by this item by reference to the section captioned “Corporate Governance” in our Schedule 14A Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2021.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
We incorporate the information required by this item by reference to the sections captioned “Fees for Professional Services” and “Pre-approval Policies and Procedures” in our Schedule 14A Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2021.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial statements filed as part of this report:
Consolidated Balance Sheets as of September 30, 2021 and 2020
Consolidated Statements of Operations for the years ended September 30, 2021 and 2020
Consolidated Statements of Comprehensive Loss for the years ended September 30, 2021 and 2020
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020
Notes to Consolidated Financial Statements
(2) Financial statement schedules
All other financial statements and schedules not listed have been omitted since the required information is included in the consolidated financial statements or the notes thereto included in Item 8, or is not applicable, material or required.
(3) Exhibits
Incorporated by Reference
Exhibit
No.
Description
Filed with
this Form
10-K
Form
Filing Date
Exhibit
No.
3.1
Articles of Organization and amendments thereto
10-K
December 26, 2007
3.1
3.2
By-laws, as amended December 13, 2012
10-K
December 20, 2012
3.2
4.1
Description of Securities
10-K
December 28, 2020
4.1
10.1
Form of Employee Invention and Non-Disclosure Agreement
10-K
November 22, 1996
10.3
10.2
CSPI Supplemental Retirement Income Plan
10-K
December 29, 2008
10.2
10.3*
2007 Stock Incentive Plan
DEF 14A
March 30, 2007
B
10.4*
2014 Variable Compensation (Executive Bonus) and Base Programs dated November 12, 2013
10-K
December 23, 2014
10.10
10.5*
Death Benefit and Retirement Benefit Agreement between the Company and Victor Dellovo dated September 13, 2013
10-K
December 24, 2013
10.11
10.6*
Form of Change of Control Agreement with Gary W. Levine dated January 11, 2008
10-K
December 23, 2010
10.11
10.7*
2014 Employee Stock Purchase Plan
DEF 14A
January 6, 2014
A
10.8*
2015 Stock Incentive Plan
DEF 14RA
January 25, 2019
A
10.9
2015 Lowell, MA Lease
10-K
December 24, 2015
10.21
10.10
2015 Deerfield Beach, FL Lease
10-K
December 24, 2015
10.20
10.11*
Executive Retention and Service Agreement with Victor Dellovo, dated September 4, 2012
10-Q
February 14, 2018
10.1
10.12*
Forms of Employee Restricted Stock Award Agreement
10-Q
February 14, 2018
10.2
10.13
Share Purchase and Assignment Agreement
8-K
June 27, 2018
2.1
10.14
Note, dated as of April 17, 2020, by, and between Paragon Bank and CSP, Inc.
8-K
April 23, 2020
10.1
10.15
Note, dated as of April 17, 2020, by, and between Paragon Bank and Modcomp, Inc.
8-K
April 23, 2020
10.2
21.1
Subsidiaries
X
23.1
Consent of RSM LLP, Independent Registered Public Accounting Firm
X
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
*
Management contract or compensatory plan.