CSPI

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 6% ($3.5 million) driven by the TS segment, which grew 11% to $56.8 million. This was offset by a 54% decline in HPP revenue to $1.9 million.
• HPP Segment Decline: The HPP segment saw a significant drop in product revenue ($2.1 million decrease), primarily due to the absence of a $2.0 million non-recurring ARIA Zero Trust (AZT) software license sale in the prior year and reduced Myricom revenue.
• Margin Compression: Gross margin percentage decreased from 34% to 32%. The HPP segment margin dropped sharply from 65% to 46% due to the loss of high-margin non-recurring license sales. TS segment margins remained relatively stable at 31%.
• Operating Loss Expansion: Operating loss widened to $3.1 million from $1.9 million, attributed to increased R&D expenses ($3.3 million vs. $3.0 million) and SG&A expenses ($18.4 million vs. $17.8 million), alongside the decline in HPP gross profit.
• Tax Benefit: The company recorded a significant income tax benefit of $1.6 million (effective rate 94.5%), compared to $0.1 million in 2024, largely due to U.S. pre-tax losses and windfalls from restricted stock awards.

Guidance, Outlook, and Risks

Outlook and Strategy: Management expects the TS segment to continue growing through managed services and VAR sales. The HPP segment is focusing on expanding the ARIA cybersecurity portfolio, particularly the AZT PROTECT product in critical infrastructure markets (energy, utilities), though sales cycles in these sectors can be up to one year. The legacy Multicomputer and Myricom product lines are expected to continue declining.

Liquidity: The company maintains a $15.0 million inventory line of credit with $14.1 million available. Management believes cash, operating cash flow, and credit availability are sufficient for the next 12 months.

Risks and Contingencies:

• Customer Concentration: While no single customer exceeded 10% of revenue, the company relies on a small number of significant customers in both segments.
• Geopolitical Risks: Conflicts in Russia/Ukraine and Israel/Hamas pose risks of supply chain disruption and cyberattacks, though direct impact on revenue is currently limited.
• Trade Policy: New U.S. tariffs announced in Q2 2025 on imports from China, India, and others create uncertainty regarding future costs and retaliatory measures.
• Internal Controls: The company remediated two material weaknesses identified in 2024 related to corporate credit card usage and income tax reporting. Management concluded internal controls were effective as of September 30, 2025.

Investor Verification Checklist

• HPP Revenue Sustainability: Verify the trajectory of ARIA AZT PROTECT sales to determine if the HPP segment can recover from the loss of the prior year's non-recurring license sale.
• TS Segment Margins: Monitor the mix of low-margin hardware reselling versus higher-margin managed services to ensure gross margins do not compress further.
• Financing Receivables: Review the $14.9 million in financing receivables (Note 3) for credit quality, as a significant portion is concentrated in a few customers (Customer E represents 40% of financing receivables).
• U.K. Pension Plan: Confirm the status of the U.K. defined benefit pension plan buy-in contract and the timeline for its transition to a buy-out, which affects future liability recognition.
• Tax Rate Volatility: Assess the sustainability of the 94.5% effective tax rate, which was heavily influenced by stock compensation windfalls and valuation allowance changes.