CSP Inc. (Nasdaq: CSPI) — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021; comparisons are with fiscal 2020. CSPi operates Technology Solutions (TS), a value-added IT reseller and services business, and High Performance Products (HPP), which sells cybersecurity software, network adapters, and legacy defense products.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $49.2 million | $61.8 million |
| Gross profit / margin | $16.1 million / 33% | $17.2 million / 28% |
| Operating loss | $1.4 million | $1.4 million |
| Net income (loss) | $0.7 million | $(1.4) million |
| Operating cash flow | $1.9 million | $0.2 million |
| Cash and equivalents at year-end | $20.0 million | $19.3 million |
- Revenue fell 20%. TS revenue declined $11.3 million to $44.6 million; HPP declined $1.3 million to $4.6 million. TS represented 91% of sales and HPP 9%.
- Product revenue decreased to $35.2 million from $48.0 million, while service revenue edged up to $14.0 million from $13.8 million.
- Gross profit dollars declined about $1.0 million despite the five-percentage-point increase in gross margin. Management attributed the margin improvement primarily to revenue mix and stronger TS product margins.
- Net income included a $2.2 million gain from forgiveness of Paycheck Protection Program loans and a $465,000 gain from a purchase-price adjustment on the 2018 sale of Modcomp GmbH. Continuing-operations net income was $234,000; basic and diluted EPS were $0.16 overall and $0.05 from continuing operations.
- Operating cash flow improved year over year, with material working-capital movements, including increased receivables and payables. Cash increased by $743,000 during the year.
- Current assets were $49.0 million and current liabilities $17.8 million (current ratio approximately 2.8). The $15 million inventory credit facility had $14.1 million available; $941,000 was outstanding and the company reported covenant compliance.
- Notes payable totaled $1.6 million, including current and noncurrent portions. The balance sheet also included $4.1 million of pension and retirement liabilities and $4.8 million of other noncurrent liabilities, largely associated with vendor financing agreements.
Material changes and management commentary
- Management attributed the sales decline primarily to COVID-19-related customer budget cuts and reduced ability to conduct in-person sales and product deployments. Supply shortages, longer lead times, shipping delays, and component price increases also affected operations.
- TS backlog increased to approximately $8.7 million from $4.3 million, expected to ship or be provided in FY2022. HPP backlog rose to $4.3 million from $0.6 million, expected to be fulfilled through FY2023. Backlog can fluctuate substantially.
- ARIA SDS had limited FY2021 revenue, which management linked to pandemic-related limits on customer trials and data-center access; the customer pipeline recovered in the second half. R&D expense was $2.9 million versus $2.8 million.
- The company received $16.7 million of scheduled customer payments, including interest, under FY2021 multi-year financing arrangements and recorded approximately $0.9 million of net revenue as agent. Related vendor payments totaled $9.2 million, including interest.
- Management said available cash, operating cash generation, and credit availability should fund working capital and capital expenditure needs for at least 12 months from the filing date. It provided no specific revenue or earnings guidance and said the duration and extent of pandemic impacts could not be reasonably estimated.
Risks, contingencies, and controls
- Customer concentration remains an important risk. No customer represented 10% or more of FY2021 revenue, but Customer A accounted for approximately 62% of year-end consolidated accounts receivable ($16.2 million). Management said it did not believe this balance posed significant credit risk.
- Other principal risks include COVID-19 and supply-chain disruption, reliance on sole-source HPP components, dependence on federal defense contracting, intense competition, hiring and retention of technical staff, and the uncertain commercial returns on ARIA SDS investment.
- The company recorded a full valuation allowance against U.S. deferred tax assets in FY2021 and continued to maintain a full allowance against U.K. deferred tax assets, citing results and uncertainty about future taxable income.
- A material weakness related to gross-versus-net revenue recognition identified in FY2020 was reported remediated after redesigned controls were implemented and tested during FY2021. Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor did not provide an ICFR attestation.
- The company reported no material pending legal proceedings. The independent auditor issued an unqualified opinion on the financial statements and identified principal-versus-agent revenue recognition as a critical audit matter.
- Dividends and share repurchases remained suspended; no dividend was paid in FY2021.
Important facts for investors to verify
- Whether the $16.2 million Customer A receivable is collected on schedule and the related credit assessment remains supportable.
- How much of the improved gross margin and higher backlog converts to revenue, cash flow, and sustainable operating profitability.
- Whether component availability, shipping delays, and input-price increases ease or continue to constrain deliveries and margins.
- Progress in converting ARIA SDS pipeline activity into recurring commercial revenue relative to ongoing development and marketing costs.
- The terms, payment schedules, and customer/vendor counterparties for the multi-year financing arrangements and their effect on working capital and cash generation.
- Future pension funding requirements, deferred-tax-asset recoverability, and the status of the revenue-recognition controls and remediation.