CSP Inc. (NASDAQ: CSPI) — Form 10-Q Summary
Business context and reporting period. CSPi provides IT integration, security products, managed IT services, network adapters and high-performance computing systems through its Technology Solutions (TS) and High Performance Products (HPP) segments. This unaudited report covers the fiscal third quarter and nine months ended June 30, 2021. Financial amounts below are in U.S. dollars; “million” amounts are rounded.
Financial performance and liquidity
- Third quarter: Revenue was $13.72 million, down 0.4% year over year. Gross profit was $4.23 million and gross margin was 30.8%, essentially unchanged. Operating loss was $357,000 versus $393,000; net loss was $423,000, or $0.10 per share, versus $210,000, or $0.05 per share.
- Nine months: Revenue was $39.20 million, down 17.5% from $47.52 million. Gross profit declined to $11.98 million from $12.74 million, while gross margin improved to 30.6% from 26.8%. Operating loss was $1.02 million versus $938,000. Net loss narrowed to $119,000, or $0.03 per share, from $1.48 million, or $0.37 per share.
- Revenue mix and drivers: Third-quarter TS revenue increased 5% to $12.76 million, with services up 25%; HPP revenue fell 39% to $958,000, primarily on lower services and royalties. For the nine months, TS revenue fell 18% to $35.80 million, mainly on lower U.S. product sales, while HPP revenue fell 17% to $3.40 million, mainly on lower services and royalties.
- Other items and taxes: Nine-month other income included a $2.20 million gain from forgiveness of the 2020 PPP loans, partly offset by a $731,000 foreign-exchange loss. The company reported $749,000 pretax income but a $119,000 net loss, including $868,000 income tax expense, driven largely by an increased valuation allowance against deferred tax assets. The third-quarter foreign-exchange loss was $110,000.
- Cash flow: Cash from operations was $877,000 for the nine months, compared with $1.23 million in 2020. Investing used $153,000 and financing used $322,000; cash increased $389,000 to $19.65 million. Operating cash flow reflected, among other items, a $7.4 million increase in accounts and long-term receivables, partly offset by higher accounts payable and other long-term liabilities.
- Balance sheet and debt: At June 30, cash was $19.65 million, current assets $45.76 million, current liabilities $16.41 million, total assets $60.56 million and shareholders’ equity $30.65 million. Notes payable were $1.70 million and line-of-credit borrowings were $1.65 million. The $15 million inventory credit facility had $13.3 million available; the company reported covenant compliance and no cash withdrawals under its limited cash-withdrawal feature.
Material changes, outlook and risks
- Nine-month revenue declined primarily because major TS U.S. customers reduced or froze budgets during the pandemic. Management said pandemic effects and the timing of economic recovery remained uncertain and could not be reasonably estimated.
- Management believed cash, operating cash generation and available credit would meet working-capital and capital-expenditure needs for at least 12 months from the filing date. No specific revenue or earnings guidance was provided.
- Two customer-related multi-year arrangements entered in fiscal 2021 increased receivables: the filing reports approximately $12.7 million of accounts and long-term receivables with payment terms over one year at June 30. Customer B represented approximately 51% of consolidated accounts and long-term receivables, versus 28% at September 30, 2020. The company reported no allowance or impairment on the over-one-year receivables and said it believed customer credit risk was not significant.
- Vendor agreements associated with the multi-year customer arrangements increased recorded liabilities. The company reported approximately $6.8 million due to one vendor, including the agreements and other payables, equal to about 40% of accounts payable and other noncurrent liabilities; management said alternative suppliers were available on comparable terms.
- Disclosure controls were deemed ineffective because management could not conclude that a previously identified material weakness in revenue recognition had been remediated. The weakness involved determining whether the company acted as principal or agent. Enhanced transaction reviews were implemented, but remediation remained unconfirmed.
- The filing identifies customer concentration, U.S. federal-government contract dependence, single-source component reliance, competition, tax-law changes and COVID-19 as risks. It reports no material changes to the risk factors in the fiscal 2020 Form 10-K.
- Comparative 2020 revenue and cost-of-sales figures were revised to correct an immaterial gross-versus-net presentation error. The revision did not change gross profit, operating loss or net loss.
Important facts for investors to verify
- Whether the TS U.S. product-sales decline and pandemic-related customer budget pressure persisted after June 30, and whether the TS services growth is sustainable.
- Collection timing and credit quality of the long-term receivables, particularly the concentration in Customer B, and the related cash-flow implications.
- The full payment schedule, accounting presentation and cash commitments under the customer and vendor multi-year arrangements.
- Whether the revenue-recognition material weakness has since been remediated and whether the enhanced controls operate effectively.
- Whether operating cash flow can remain positive without continued increases in payables or other liabilities, and whether tax valuation-allowance estimates change.