CSPI

Material Changes vs. Prior Period

• Revenue Growth: Q2 sales increased 22% year-over-year, driven primarily by the TS segment (+25%), while HPP sales declined 46% due to lower ARIA product revenue and non-recurring service sales.
• Margin Compression: Q2 gross margin percentage decreased to 28% from 32% in the prior year, attributed to a higher volume of lower-margin product sales in the TS segment. However, YTD gross margin improved to 33%.
• Operating Performance: Operating loss narrowed to $0.85 million in Q2 from $0.99 million in the prior year. YTD operating loss improved to $0.96 million from $1.35 million.
• Financing Receivables: Financing receivables (net) increased significantly to $16.36 million from $6.39 million in the prior year, reflecting expanded customer financing programs in the TS-US division. This was accompanied by a corresponding increase in vendor financing liabilities.
• Cash Flow: Operating cash flow turned negative, using $3.41 million for the six months ended March 31, 2026, compared to providing $3.65 million in the prior year. This was primarily due to payments on accounts payable and continued investment in product development.

Outlook, Risks, and Management Commentary

• Segment Performance: Management notes that the TS segment's growth is driven by increased sales to major US customers and higher third-party maintenance sales. The HPP segment continues to invest in the ARIA Zero Trust Gateway, resulting in flat R&D expenses but lower near-term product revenue.
• Liquidity: The company maintains a $15.0 million inventory line of credit with $14.1 million available. Management believes current cash, operating cash flow, and credit availability are sufficient for working capital needs for at least 12 months.
• Risks: Key risks include dependence on a small number of customers (Customer A represented 12% of AR and Customer B 16% of financing receivables), intense competition, and geopolitical impacts on global trade. The company also faces credit risk associated with its growing portfolio of financing receivables.
• Dividends: The company declared and paid quarterly dividends of $0.03 per share in Q2 2026.

Investor Verification Checklist

• Customer Concentration: Verify the stability of revenue from top customers (Customer A, B, F, G) which represent significant portions of receivables and revenue.
• Financing Receivables Quality: Review the credit quality of the $16.36 million financing receivables portfolio, specifically the allowance for credit losses and the risk rating distribution (Low, Moderate, High).
• Vendor Financing Alignment: Confirm that the increase in customer financing is matched by vendor financing terms to avoid cash flow strain, as noted in the liquidity section.
• HPP Product Pipeline: Assess the timeline for revenue recognition from the ARIA Zero Trust Gateway development to determine when R&D investments will translate to sales.
• Operating Cash Flow Trend: Monitor the reversal of negative operating cash flow, which was driven by working capital payments in the current period.