What changed in this filing

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Item 1. Financial Statements

2024-02-14 compared with 2023-08-09 · 231 added, 323 removed, 344 unchanged (62% of the section changed)

6 unchanged sentences

Cash and cash equivalents

Investments - held-to-maturity

Accounts receivable, net of allowances of $ 61 and $ 100

Investment in lease, net-current portion

Refundable income taxes

Financing receivables, net of allowances of $ 22 and $ 0

Other current assets

3 unchanged sentences

Intangibles, net

Investment in lease, net-less current portion

Long-term receivable

Deferred income taxes

Financing receivables due after one year, net of allowances of $ 55 and $ 0

Deferred income taxes, net

Cash surrender value of life insurance

4 unchanged sentences

Line of credit

Notes payable - current portion

Deferred revenue

Pension and retirement plans

Income taxes payable

Total current liabilities

Pension and retirement plans

Notes payable - noncurrent portion

Operating lease liabilities - noncurrent portion

16 unchanged sentences

Three Months Ended

Nine Months Ended

Cost of sales:

4 unchanged sentences

Total operating expenses

Operating income (loss)

Operating (loss) income

Other income (expense):

Foreign exchange (loss) gain

Foreign exchange loss

Interest expense

Interest income

Other income (expense), net

Other income, net

Total other income (expense), net

Income before income taxes

Income tax (benefit) expense

Net income attributable to common shareholders

Net income per common share - basic

(Loss) income before income taxes

Income tax expense

Net (loss) income

Net (loss) income attributable to common shareholders

Net (loss) income per common share - basic

Weighted average common shares outstanding – basic

Net income per common share - diluted

Net (loss) income per common share - diluted

Weighted average common shares outstanding – diluted

1 unchanged sentence

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

Three Months Ended

Nine Months Ended

Foreign currency translation gain (loss) adjustments, net

Total comprehensive income (loss)

See accompanying notes to unaudited condensed consolidated financial statements.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended June 30, 2023 and 2022:

(Amounts in thousands, except per share data)

comprehensive

Shareholders’

Three Months Ended June 30, 2023:

Balance as of March 31, 2023

Other comprehensive income

Stock-based compensation

Purchase of common stock

Cash dividends paid on common stock ($ 0.04 per share)

Balance as of June 30, 2023

comprehensive

Shareholders’

Three Months Ended June 30, 2022:

Balance as of March 31, 2022

Other comprehensive loss

Stock-based compensation

Restricted stock cancellation

Restricted stock issuance

Purchase of common stock

Balance as of June 30, 2022

Net (loss) income

Foreign currency translation gain adjustments, net

Total comprehensive income

See accompanying notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the nine months ended June 30, 2023 and 2022:

For the three months ended December 31, 2023 and 2022:

(Amounts in thousands, except per share data)

1 unchanged sentence

Shareholders’

Nine months ended June 30, 2023:

Three months ended December 31, 2023:

Balance as of September 30, 2023

Adoption of Accounting Standards Update 2016-13

Other comprehensive income

Stock-based compensation

Restricted stock issuance

Issuance of shares under employee stock purchase plan

Purchase of common stock

Cash dividends paid on common stock ($ 0.10 per share)

Balance as of June 30, 2023

Dividends declared ($ 0.04

Balance as of December 31, 2023

comprehensive

Shareholders’

Nine months ended June 30, 2022:

Three months ended December 31, 2022:

Balance as of September 30, 2022

Other comprehensive loss

Other comprehensive income

Stock-based compensation

Restricted stock cancellation

Restricted stock issuance

Issuance of shares under employee stock purchase plan

Purchase of common stock

Balance as of June 30, 2022

Dividends declared ($ 0.03

Balance as of December 31, 2022

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Amounts in thousands)

Nine Months Ended

Three Months Ended

Operating activities

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Amortization of intangibles

Loss on sale of fixed assets, net

Foreign exchange loss (gain)

Provision for losses (recoveries) on accounts receivable

Foreign exchange loss

Provision for credit losses

Provision for obsolete inventory

Amortization of lease right-of-use assets

Stock-based compensation expense on stock options and restricted stock awards

Deferred income taxes

Decrease in cash surrender value of life insurance

Stock-based compensation expense on restricted stock awards

Increase in cash surrender value of life insurance

Changes in operating assets and liabilities:

(Increase) decrease in accounts receivable

Decrease (increase) in inventories

Decrease in accounts receivable

Decrease in financing receivable

(Increase) decrease in inventories

Decrease in refundable income taxes

Increase in operating lease right-of-use assets

Decrease (increase) in other assets

Decrease in investment in lease

(Increase) decrease in long-term receivable

Decrease in accounts payable and accrued expenses

Decrease in interest payable

Decrease in other assets

Increase (decrease) in accounts payable and accrued expenses

Increase in interest payable

Decrease in operating lease liabilities

(Decrease) increase in deferred revenue

Decrease in deferred revenue

Decrease in pension and retirement plans liabilities

Decrease in other long-term liabilities

Net cash (used in) provided by operating activities

Increase in income taxes payable

Increase (decrease) in other long-term liabilities

Net cash provided by (used in) operating activities

Investing activities

Life insurance premiums paid

Purchase of held-to-maturity investments

Proceeds from maturities of held-to-maturity investments

Proceeds from corporate life insurance owned policy

Proceeds from sales of property, equipment, and improvements

Additions of intangible assets

Purchases of property, equipment and improvements

Net cash (used in) provided by investing activities

Net cash used in investing activities

Financing activities

Dividends paid

Net borrowing under line-of-credit agreement

Repayments on notes payable

Repayments on note payable

Principal payments on finance leases

Purchase of common stock

Proceeds from issuance of shares under equity compensation plans

Net cash (used in) provided by financing activities

Net cash used in financing activities

Effects of exchange rate on cash, net

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents beginning of year

Cash and cash equivalents end of year

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents beginning of period

Cash and cash equivalents end of period

Supplementary cash flow information:

Cash paid (received) for income taxes

Cash paid for income taxes

Cash paid for interest

Supplementary non-cash financing activities:

Obtaining a right-of-use asset in exchange for a lease liability

Customer financing for inventory sold (see Note 6 Accounts and Long-Term Receivable for details)

Dividend declared during period

Customer financing for inventory sold (see Note 5 Financing receivables for details)

See accompanying notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2023

Organization and Business

("CSPi"

or "CSPI"

or "the Company"

or "we"

or "our") was incorporated in 1968 and is based in Lowell, Massachusetts.

("CSPi" or "CSPI" or "the Company" or "we" or "our") was incorporated in 1968 and is based in Lowell, Massachusetts.

CSPi and its subsidiaries develop and market IT integration solutions, advanced security products, managed IT services, purpose built network adapters, and high-performance cluster computer systems to meet the diverse requirements of its commercial and defense customers worldwide.

The Company operates in two segments, its Technology Solutions (“TS”) segment and High Performance Products (“HPP”) segment.

Basis of Presentation and New Significant Accounting Policy

Summary of Significant Accounting Policies

Basis of presentation

The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented.

The accompanying interim condensed consolidated financial statements have been prepared by the Company and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented.

All adjustments were of a normal recurring nature.

1 unchanged sentence

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited condensed consolidated financial statements should be read in conjunction with the notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

New Significant Accounting Policy – Held-to-maturity investment securities

Our investment securities are classified as held-to-maturity investments and consists of treasury bills, which mature at different intervals with the last maturity date in August of 2023.

These investments are stated at amortized cost.

The carrying value of these investments as of June 30, 2023 was $2.4 million and we did not have any outstanding investments as of September 30, 2022.

We did not record any gains or losses on these securities during the nine months ended June 30, 2023.

The estimated fair value of these investments approximated their carrying values of June 30, 2023.

We do not intend to sell these investments.

Presentation - sales whose payment terms exceed one year

Effective as of December 31, 2023 sales whose payment terms exceed one year is now presented as “Finance receivables, net of allowance” on the Consolidated Balance Sheets rather than being combined with Accounts receivable.

The financial statement line item Long-term receivable is now labeled as “Financing receivables due after one year, net of allowances.” These changes are reflected retrospectively as of September 30, 2023.

This change was made to provide more detail on the balance sheet related to these receivables and align with our footnotes.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

These estimates and assumptions are related to reserves for bad debt, reserves for inventory obsolescence, the impairment assessment of intangible assets, right-of-use assets and lease liabilities, and the calculation of standalone selling price for revenue recognition, the calculation of liabilities related to deferred compensation and retirement plans and the calculation of income tax liabilities.

These estimates and assumptions are related to the allowance for credit losses for accounts receivable and financing receivables, reserves for inventory obsolescence, the impairment assessment of intangible assets, right-of-use assets and lease liabilities, and the calculation of standalone selling price for revenue recognition, the calculation of liabilities related to deferred compensation and retirement plans and the calculation of income tax liabilities.

Actual results may differ from those estimates under different assumptions or conditions.

Recent Accounting Pronouncements

New accounting standards not adopted as of June 30, 2023

Significant Accounting Policies

Except for the change in certain accounting policies upon adoption of the accounting standard described below, there have been no significant changes to the Company's significant accounting policies described in PART II, Item 8, Note 1, "Summary of Significant Accounting Policies", of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) , an amendment of the FASB Accounting Standards Codification.

This ASU will change how entities account for credit losses for most financial assets and certain other instruments.

For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses.

For available-for-sale debt securities (if any), entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset.

Additionally, there will be a significant increase in the amount of disclosures by year of origination for certain financing receivables.

For public entities classified as a smaller reporting company, the new standard is effective for annual periods beginning after December 15, 2022 (ASU 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):

Effective Dates ), including interim periods within that annual period.

The Company is evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

Additional updates were issued in 2018-2020.

The amended guidance replaces the current incurred loss impairment methodology for measurement of credit losses on financial instruments with a methodology (the “current expected credit losses model,” or “CECL model”) that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

Under the CECL model, the allowance for losses on financial assets, measured at amortized cost, reflects management’s estimate of credit losses over the remaining expected life of such assets.

The Company adopted ASU 2016-13 (the “new CECL standard”) as of October 1, 2023 using the modified retrospective method, with a cumulative-effect adjustment to the opening balance of Shareholders’ equity as of October 1, 2023.

The adoption primarily impacted the estimation of our Allowance for credit losses for Accounts receivable and Financing receivables.

Additionally, it affected allowance for credit losses of contract assets and investment in lease, net with effects being immaterial.

The total impact recorded on our initial adoption of ASU 2016-13 as of October 1, 2023 included an increase of Accounts receivable, net of $ 67 k and a decrease of Financing receivables, net in the amount of $ 82 k with the total adjustment decreasing retained earnings of $ 15 k.

For the accounting policies adopted and details of impacts from adoption refer to Note 4 - Accounts receivable, net and Note 5 - Financing receivables, net .

We derive revenue from the sale of integrated hardware and software, third-party service contracts, professional services, managed services, financing of hardware and software, and other services.

23 unchanged sentences

HPP Segment Revenue

HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multicomputer, Myricom, and ARIA product lines.

HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Myricom, Multicomputer, and ARIA product lines.

ARIA revenue is derived from sale of hardware, software, and managed services.

Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products’ functionality, and post contract maintenance and support.

3 unchanged sentences

Technology Solutions Segment

Three months ended June 30,

(Amounts in thousands)

Technology Solutions Segment

Three months ended June 30,

(Amounts in thousands)

Technology Solutions Segment

Nine months ended June 30,

Three months ended December 31.

(Amounts in thousands)

Technology Solutions Segment

Nine months ended June 30,

Three months ended December 31.

(Amounts in thousands)

3 unchanged sentences

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.

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.

22 unchanged sentences

When we have the right to bill a customer, accounts receivable is recorded as an unconditional right exists.

Current contract assets were $ 2.1 million and $ 4.4 million as of June 30, 2023 and September 30, 2022, respectively.

Current contract assets were $ 0.6 million and $ 0.9 million as of December 31, 2023 and September 30, 2023, respectively.

The current portion is recorded in other current assets on the condensed consolidated balance sheets.

There were no noncurrent contract assets as of June 30, 2023 and September 30, 2022.

There were no noncurrent contract assets as of December 31, 2023 and September 30, 2023.

The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before we transfer a good or service to the customer.

Current contract liabilities were $ 3.5 million and $ 4.1 million as of June 30, 2023 and September 30, 2022, respectively.

Current contract liabilities were $ 1.3 million and $ 1.9 million as of December 31, 2023 and September 30, 2023, respectively.

The current portion of contract liabilities is recorded in deferred revenue on the condensed consolidated balance sheets.

There were no long-term contract liabilities as of June 30, 2023 and September 30, 2022, respectively.

Revenue recognized for the three and nine months ended June 30, 2023 that was included in contract liabilities as of September 30, 2022 was $ 0.5 million and $ 2.4 million, respectively.

There were no long-term contract liabilities as of December 31, 2023 and September 30, 2023, respectively.

Revenue recognized for the three months ended December 31, 2023 that was included in contract liabilities as of September 30, 2023 was $ 0.9 million.

Contract Costs

4 unchanged sentences

Incremental costs are related to commissions in the TS portion of the business.

Current capitalized contract costs are within the other current assets on the condensed consolidated balance sheets as of June 30, 2023 and September 30, 2022.

The portion of current capitalized costs were $ 149 thousand and $ 128 thousand as of June 30, 2023 and September 30, 2022, respectively.

Current capitalized contract costs are within the other current assets on the condensed consolidated balance sheets as of December 31, 2023 and September 30, 2023.

The portion of current capitalized costs were $ 159 thousand and $ 172 thousand as of December 31, 2023 and September 30, 2023, respectively.

There are no noncurrent capitalized costs on the condensed consolidated balance sheets as these commissions are paid annually even when the contract extends beyond a one year period.

The amount of incremental costs amortized for the three months ended June 30, 2023 and 2022 were $ 103 thousand and $ 91 thousand, respectively.

The amount of incremental costs amortized for the nine months ended June 30, 2023 and 2022 were $ 302 thousand and $ 272 thousand, respectively.

The amount of incremental costs amortized for the three months ended December 31, 2023 and 2022 were $ 108 thousand and $ 98 thousand, respectively.

This is recorded in Selling, general, and administrative expenses.

There was no impairment related to incremental costs capitalized during the nine months ended June 30, 2023 and 2022.

There was no impairment related to incremental costs capitalized during the nine months ended December 31, 2023 and 2022.

Costs to fulfill a contract are capitalized when the costs are related to a contract or anticipated contract, generate or enhance resources that will be used in satisfying performance obligations in the future, and costs are recoverable.

1 unchanged sentence

Current capitalized fulfillment costs are in the other current assets and noncurrent costs are in other assets on the condensed consolidated balance sheets.

The were no current capitalized costs as of June 30, 2023 and $ 9 thousand as of September 30, 2022.

The were no noncurrent capitalized costs as of June 30, 2023 and September 30, 2022, respectively.

The amount of fulfillment costs amortized for the three months ended June 30, 2023 and 2022 were $ 3 thousand and $ 3 thousand, respectively.

The amount of fulfillment costs amortized for the nine months ended June 30, 2023 and 2022 were $ 9 thousand and $ 9 thousand, respectively.

The were no current capitalized costs as of December 31, 2023 and September 30, 2023.

The were no noncurrent capitalized costs as of December 31, 2023 and September 30, 2023, respectively.

The were no fulfillment costs amortized for the three months ended December 31, 2023.

The amount of fulfillment costs amortized for the three months ended December 31, 2022 was $ 3 thousand.

These costs amortized were recorded in Cost of sales.

There was no impairment related to fulfillment costs capitalized for the nine months ended June 30, 2023 and 2022.

There was no impairment related to fulfillment costs capitalized for the three months ended December 31, 2023 and 2022.

Projects are typically billed upon completion or at certain milestones.

3 unchanged sentences

There are certain contracts that contain a financing component.

See Note 6 to the condensed consolidated financial statements for additional information.

See Note 5 Financing receivables to the condensed consolidated financial statements for additional information.

We elected to use the optional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that have an original expected duration of one year or less.

4 unchanged sentences

Managed service contracts are generally longer than one year.

For these contracts the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2023 is set forth in the table below:

For these contracts the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of December 31, 2023 is set forth in the table below:

(Amounts in thousands)

Earnings Per Share of Common Stock

Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period.

Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive restricted stock awards and is computed by dividing net income by the assumed weighted average number of common shares outstanding.

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period.

Diluted net income (loss) per share includes the dilutive effect of restricted stock, if any, calculated using the treasury stock method.

For unvested restricted stock, assumed proceeds under the treasury stock method would include unamortized compensation cost.

We are required to present earnings per share (“EPS”), utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities

Basic and diluted earnings per share computations for the Company’s reported net income attributable to common stockholders are as follows:

Basic and diluted earnings per share computations for the Company’s reported net loss attributable to common stockholders are as follows:

Three Months Ended

Nine months ended

(Amounts in thousands except per share data)

Net (loss) income

net income attributable to nonvested common stock

Net income attributable to common shareholders

Net (loss) income attributable to common shareholders

Weighted average total shares outstanding – basic

3 unchanged sentences

Weighted average common shares outstanding – diluted

Net income per common share - basic

Net income per common share - diluted

Anti-dilutive securities include restricted stock, which are excluded from the diluted income per share computation.

Non-vested restricted stock awards of 16 thousand and 98 thousand shares were excluded from the diluted net income per share calculation for the three and nine months ended June 30, 2023, respectively.

Non-vested restricted stock awards of 231 thousand and 194 thousand shares were excluded from the diluted net income per share calculation for the three and nine months ended June 30, 2022, respectively.

Accounts and Long-Term Receivable

Within Accounts receivable and Long-term receivable there are amounts due reflecting sales whose payment terms exceed one year .

Net (loss) income per common share - basic

Net (loss) income per common share - diluted

Anti-dilutive securities include restricted stock, which are excluded from the diluted income (loss) per common share computation.

Non-vested restricted stock awards of 207 thousand were excluded from the diluted loss per common share calculation for the three months ended December 31, 2023 because there was a net loss for this period and their inclusion would have been anti-dilutive.

Accounts receivable, net

Upon adoption of the new CECL standard as described in Note 1, the Company recognizes an allowance for losses on accounts receivable in an amount equal to the current expected credit losses.

The estimation of the allowance is based on an analysis of historical loss experience, management’s assessment of current conditions and reasonable and supportable expectation of future conditions as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible including reviewing the current receivables aging.

This results in a general reserve and a specific reserve.

The Company assesses collectability by pooling receivables where similar characteristics exist and evaluates receivables individually when specific customer balances no longer share those risk characteristics and are considered at risk or uncollectible.

The expense associated with the allowance for expected credit losses is recognized in Selling, general, and administrative expenses in the Consolidated Statements of Operations.

Amounts disclosed below for the three months ended December 31, 2023 reflect adoption of the new CECL standard and the amounts disclosed for the three months ended December 31, 2022 reflect superseded guidance.

The following table presents the components of the Company’s accounts receivable for the periods indicated.

Three months ended

December 31, 2023

December 31, 2022

(Amounts in thousands)

Allowance for credit losses for accounts receivable:

Balances at beginning of the period

Adjustment for adoption of new CECL standard

Provision for credit losses

Balances at end of the period

Financing receivables, net

In the TS U.S.

division financing of goods and services is offered to certain customers.

This involves amounts due reflecting sales whose payment terms exceed one year.

This financing is separate from agreements with a leasing component, see Note 7 Leases for financing through leases.

These receivables are included in Accounts receivable and Long-term receivable in the amount of approximately $ 8.2 million and $ 8.4 million as of June 30, 2023, respectively.

These receivables are included in Accounts receivable and Long-term receivable in the amount of $ 8.9 million and $ 7.4 million as of September 30, 2022, respectively.

The receivables with a payment term exceeding one year carry an average weighted interest rate of 5.8 %, which reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement.

There is not an allowance for credit losses nor impairments for Accounts and Long-term receivables with a contractual maturity of over one year.

All accounts have no past amounts due as of June 30, 2023 and September 30, 2022.

There was no activity in the allowance for credit losses of these receivables for the three and nine months ended June 30, 2023 and 2022, respectively.

All these agreements are looked at as one portfolio in determining credit losses.

There are various factors that are considered in extending a customer payment terms longer than one year including payment history, economic conditions, and capacity to pay.

The credit quality of customers is monitored by payment activity.

The unearned income represents a rate similar to market at the inception of the agreement.

The amount of interest income earned from sales whose payment terms exceed one year for the three months ended June 30, 2023 and 2022 was $ 234 thousand and $ 108 thousand, respectively.

The amount of interest income earned from sales whose payment terms exceed one year for the nine months ended June 30, 2023 and 2022 was $ 605 thousand and $ 369 thousand, respectively.

Determining whether to offer financing involves looking at the customer’s payment history, economic conditions, and capacity to pay.

The Company assigns an internal risk rating to each customer at inception, which groups customers into a portfolio based off this risk rating.

A risk rating is assigned by analyzing a customer’s financial statements and the latest Fitch rating if publicly available as well as recent payment activity.

The credit quality of customers is continually monitored by these items.

Accounts rated low risk have the equivalent of a Fitch rating of BBB– or higher, while accounts rated moderate risk have the equivalent of BB.

The Company does not offer financing for customers where the risk is classified as higher, which would be lower than the equivalent of a BB Fitch rating.

Financing receivables, net carry an average weighted interest rate of 6.5 %, which reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement.

The amount of interest income earned from sales whose payment terms exceed one year for the three months ended December 31, 2023 and 2022 was $ 193 thousand and $ 182 thousand, respectively.

Interest income from these agreements is recorded in Other income (expense), net on the Condensed Consolidated Statements of Operations.

There was one new agreement effective in the first quarter of fiscal year 2023 causing an increase in Accounts and Long-term receivable.

This agreement included approximately $ 3.0 million of payments to be received over the next 2 years from the effective date of the agreement.

The revenue for this transaction was recorded net during the first quarter of fiscal year 2023.

There was one new agreement effective in the third quarter of fiscal year 2023 causing an increase in Accounts and Long-term receivable.

This agreement included approximately $ 3.1 million of payments to be received over the next 4 years from the effective date of the agreement.

The revenue for this transaction was recorded net during the third quarter of fiscal year 2023.

Receivables whose payment terms exceed one year are placed on non-accrual status, meaning interest income stops being recorded, when the customer has a past due amount in excess of 30 days or reasonable doubt exists in collecting all interest and principal.

Amounts disclosed below as of December 31, 2023 reflect adoption of the new CECL standard and the amounts disclosed as of September 30, 2023 reflect superseded guidance.

The following table presents the components of the Company’s Financing receivables, net segregated by portfolio (risk rating) for the periods indicated:

As of December 31, 2023

As of September 30, 2023

(Amounts in thousands)

Financing receivables, net:

Financing receivables, gross

Unearned interest income

Allowance for credit losses

Financing receivables, net

The following table presents the changes in Allowance for credit losses for Financing receivables, net for the periods indicated:

Three months ended

December 31, 2023

December 31, 2022

(Amounts in thousands)

Allowance for credit losses for financing receivables:

Balances at beginning of the period

Adjustment for adoption of new CECL standard

Provision charged to Consolidated Statements of Operations

Balances at end of the period

Upon adoption of the new CECL standard as described in Note 1, the Company recognizes an allowance for credit losses for financing receivables in an amount equal to the probable losses net of recoveries.

A probability method for calculating credit losses is used based on historical data of defaults of Fitch ratings and length of time.

Various factors are also assessed in the allowance for credit losses including internal historical data as well as macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the portfolios.

Macroeconomic conditions include the level of gross domestic product (“GDP”) growth and unemployment rates, which directly correlate with our historical credit losses.

The expense associated with the allowance for expected credit losses is recognized in Selling, general, and administrative expenses in the Consolidated Statements of Operations.

Financing receivables whose payment terms exceed one year are placed on non-accrual status, meaning interest income stops being recorded, when the customer has a past due amount in excess of 30 days or reasonable doubt exists in collecting all interest and principal.

A payment due in excess of 30 days is considered delinquent.

1 unchanged sentence

Recording interest income resumes once no reasonable doubt exists regarding collecting all interest and principal.

Contractual maturities of outstanding financing with an original contractual maturity over one year are as follows:

There were no financing receivables placed on non-accrual status as of December 31, 2023 or September 30, 2023.

The following table presents Financing receivables, gross, including accrued interest, by credit quality indicator segregated by risk rating and year of origination as of December 31, 2023:

December 31, 2023

Fiscal year of origination

Contractual maturities of outstanding financing receivables are as follows:

Fiscal year ending September 30:

2 unchanged sentences

unearned interest income

Total, net of unearned interest income

allowance for credit losses

Total, net of unearned interest income and allowance for credit losses

Inventories consist of the following:

9 unchanged sentences

The inventory we purchase at the TS segment is in high demand, especially in the current environment, and has a limited risk of obsolescence.

Several components used in our HPP segment products are obtained from sole-source suppliers.

We are dependent on key vendors such as ADP, NXP, and BCRM for a variety of processors for certain products.

We are dependent on NVIDIA for our high-speed interconnect components.

Despite our dependence on these sole-source suppliers, based on our current forecast and our projected sales obligations, we believe we have adequate inventory on hand and our current near-term requirements can be met in the existing supply chain.

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.

The TS segment has many vendors it transacts with and supply shortages only remain with a few of our vendors.

Information related to both lessee and lessor

The components of lease costs for the three months ended June 30, 2023 and 2022 are as follows:

The components of lease costs for the three months ended December 31, 2023 and 2022 are as follows:

Three months ended

Condensed Consolidated Statements of Operations Location

June 30, 2023

June 30, 2022

(Amounts in thousands)

Finance Lease:

Interest on lease liabilities

Interest expense

Operating Lease:

Operating lease cost

Selling, general, and administrative

Short-term lease cost

Selling, general, and administrative

Total lease costs

The components of lease costs for the nine months ended June 30, 2023 and 2022 are as follows:

Nine months ended

Condensed Consolidated Statements of Operations Location

June 30, 2023

June 30, 2022

December 31, 2023

December 31, 2022

(Amounts in thousands)

Finance Lease:

Interest on lease liabilities

Interest expense

Operating Lease:

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Total lease costs, net of sublease interest income

Supplemental cash flow information related to leases for the nine months ended June 30, 2023 and 2022 is below:

Nine months ended

June 30, 2023

June 30, 2022

Supplemental cash flow information related to leases for three months ended December 31, 2023 and 2022 is below:

Three months ended

December 31, 2023

December 31, 2022

(Amounts in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Operating cash flows from short-term leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Lease assets obtained in exchange for new lease liabilities

Operating leases

Operating cash flows paid for operating leases

Operating cash flows paid for short-term leases

Financing cash flows paid for finance leases

Cash received from subleases

Accounts payable and Other noncurrent liabilities

The Company enters into certain multi-year agreements with vendors when also entering into some of the multi-year contracts the Company enters into with customers.

See Note 6, “Accounts and Long-Term Receivable” for further information related to the multi-year agreements with customers.

Accounts payable and accrued expenses, and Other noncurrent liabilities

The Company enters into certain multi-year agreements with vendors when also entering into some of the multi-year financing contracts the Company enters into with customers.

See Note 5 Financing receivables, net for further information related to the multi-year agreements with customers.

There was not an interest rate stated in the agreements and therefore interest was imputed under ASC 835 Interest as the payments in the exchange represented two elements:

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The rate was determined primarily based on the rate the Company could obtain by financing from other sources at the date of the transaction.

Interest expense related to these agreements for the three months ended June 30, 2023 and 2022 was $ 74 thousand and $ 57 thousand, respectively.

Interest expense related to these agreements for the nine months ended June 30, 2023 and 2022 was $ 185 thousand and $ 203 thousand, respectively.

Interest expense related to these agreements for the three months ended December 31, 2023 and 2022 was $ 45 thousand and $ 56 thousand, respectively.

The amounts owed for these agreements are in Accounts payable and Other noncurrent liabilities because they are owed to vendors rather than banks or financial institutions for borrowings.

See Note 10, “Notes Payable and Line of Credit” for amounts due to banks and other financial institutions for borrowings.

See Note 9 Note Payable and Line of Credit for amounts due to banks and other financial institutions for borrowings.

Below are details of the agreements with the vendors that contain imputed interest:

June 30, 2023

December 31, 2023

September 30, 2023

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Other noncurrent liabilities

The Company had a total of approximately $ 3.3 million due (net of interest) to one of these vendors as of June 30, 2023.

The Company had a total of approximately $ 2.8 million due (net of interest) to one of these vendors as of December 31, 2023.

This is approximately 24 % of Accounts payable and other noncurrent liabilities.

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This is approximately 26 % of Accounts payable and other noncurrent liabilities.

It was the same vendor as of June 30, 2023 and September 30, 2022 that only transacts with the U.S.

division of the TS segment.

The TS segment has many vendors it transacts with and does not have any specific agreement with this vendor that it must purchase certain products from the vendor.

Management believes other suppliers could provide similar products on comparable terms.

Notes Payable and Line of Credit

In September 2019, the Company borrowed $ 1.0 million with a 5.0 % rate of interest related to a multi-year agreement with a customer.

See Note 6 for the disclosure related to the receivables.

Note Payable and Line of Credit

In October 2019, the Company borrowed $ 2.0 million with a 5.1 % rate of interest related to a multi-year agreement with a customer.

Interest expense related to the notes for the three months ended June 30, 2023 and 2022 was $ 5 thousand and $ 12 thousand, respectively.

Interest expense related to the notes for the nine months ended June 30, 2023 and 2022 was $ 16 thousand and $ 39 thousand, respectively.

June 30, 2023

The final payment on this note payable was made in the three months ended December 31, 2023.

There was no interest expense related to the note payable for the three months ended December 31, 2023.

Interest expense related to the note for the three months ended December 31, 2022 was $ 5 thousand.

December 31, 2023

September 30, 2023

1 unchanged sentence

notes discount

Notes payable - current portion

notes discount

Notes payable - noncurrent portion

As of June 30, 2023 and September 30, 2022, the Company maintained an inventory line of credit with a borrowing capacity of $ 15.0 million.

Note payable - current portion

As of December 31, 2023 and September 30, 2023, the Company maintained an inventory line of credit with a borrowing capacity of $ 15.0 million.

It may be used by the TS and HPP segments in the U.S.

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(1) a minimum current ratio of 1.2 , (2) tangible net worth of no less than $ 4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0 :1.

As of June 30, 2023 and September 30, 2022, Company borrowings, all from the TS segment, under the inventory line of credit were $ 1.3 million and $ 3.1 million, respectively, and the Company was in compliance with all financial covenants.

As of June 30, 2023 and September 30, 2022, this line of credit also includes availability of a limited cash withdrawal of up to $ 1.0 million.

As of June 30, 2023 and September 30, 2022 there were no cash withdrawals outstanding.

As of December 31, 2023 and September 30, 2023, Company borrowings, all from the TS segment, under the inventory line of credit were $ 0.8 million and $ 1.5 million, respectively, and the Company was in compliance with all financial covenants.

As of December 31, 2023 and September 30, 2023, this line of credit also includes availability of a limited cash withdrawal of up to $ 1.0 million.

As of December 31, 2023 and September 30, 2023 there were no cash withdrawals outstanding.

Pension and Retirement Plans

3 unchanged sentences

In the U.S., the Company provides benefits through supplemental retirement plans to certain former employees.

supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan.

supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company

as a vehicle to fund the costs of the plan.

The Company also provides for officer death benefits through post-retirement plans to certain current officers of the Company in the U.S.

7 unchanged sentences

plans are as follows:

Three Months Ended June 30,

(Amounts in thousands)

Interest cost

Expected return on plan assets

Amortization of past service costs

Amortization of net (gain) loss

Net periodic (benefit) cost

Post Retirement:

Interest cost

Amortization of net loss (gain)

Net periodic cost

Nine months ended June 30,

Three months ended December 31,

(Amounts in thousands)

2 unchanged sentences

Amortization of past service costs

Amortization of net (gain) loss

Amortization of net gain

Net periodic (benefit) cost

2 unchanged sentences

Amortization of net gain

Net periodic cost

Net periodic benefit

The fair value of the assets held by the U.K.

1 unchanged sentence

Fair Values as of

June 30, 2023

December 31, 2023

September 30, 2023

5 unchanged sentences

Total plan assets

An income tax benefit of $ 1.7 million was recorded for the three months ended June 30, 2023 compared to an income tax expense of $ 11 thousand in the same prior year period.

An income tax benefit of $ 1.5 million was recorded for the nine months ended June 30, 2023 compared to an income tax expense of $ 28 thousand in the same prior year period.

The Company undertakes a review of its valuation allowance at each financial statement period, reviewing the positive and negative evidence to help determine whether it is more likely than not that the Company will realize the future tax benefits from its deferred tax balances.

In the year ended September 30, 2020, the Company established a partial valuation allowance against its deferred tax assets in light of results at the time, the COVID-19 pandemic, and the resulting economic fallout, and established a full valuation during the year ended September 30, 2021.

Since that time, the COVID-19 pandemic has ended, and the Company’s Technology Solutions business has grown in fiscal years 2022 and 2023, which provided strong financial results including growth in product and software sales, third party maintenance sales, and recurring managed services and cloud software sales.

The backlog continues to be strong as of June 30, 2023.

As a result, the Company has determined that it is more likely than not that substantially all of its net deferred tax assets in the U.S.

jurisdiction will be utilized and that associated valuation allowances should be reversed during the three months ended June 30, 2023.

The valuation reversed during the period resulted in a $ 1.8 million benefit.

The Company separately analyzed the realizability of its federal and state credits and determined $ 731 thousand (net of federal benefit) of state credits are expected to expire unutilized and kept a valuation allowance against these credits.

The Company will continue to maintain a valuation allowance against certain state tax credits in the U.S.

and a full valuation allowance against the net deferred tax assets in the U.K.

jurisdiction.

The income tax provision for interim periods is generally determined based upon the expected effective income tax rate for the full year and the tax rate applicable to certain discrete transactions in the interim period.

To determine the annual effective income tax rate, we must estimate both the total income (loss) before income tax for the full year and the jurisdictions in which that income (loss) is subject to tax.

The actual effective income tax rate for the full year may differ from these estimates if income (loss) before income tax is greater than or less than what was estimated or if the

allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

With the economic uncertainty surrounding the Company’s business settling since previous quarters, we have been able to produce more accurate forecasts of our full year earnings and small changes in ordinary income no longer result in significant changes to the annualized effective tax rates.

As a result, the Company has resumed using the annualized effective tax rate method to calculate income taxes as prescribed under ASC 740 for the three months ended June 30, 2023.

The estimated annualized effective income tax rate for the nine months ended June 30, 2023 was 21.99 %.

Other differences between our effective income tax rate and the U.S.

federal statutory rate are the impact of state taxes and tax credits that we expect to be able utilize against federal and state taxes.

The effective tax rate for the three and nine months ended June 30, 2023 was a benefit of ( 205.8 %) and ( 64.5 %), respectively, which was primarily driven by the release of the valuation against the Company's deferred tax assets.

The income tax expense for the three and nine months ended June 30, 2022 was primarily driven by minimum state tax expenses due to the full valuation allowance in place during the period.

As of June 30, 2023, management assessed the balances of its deferred tax assets and liabilities to determine if any uncertain tax positions existed that would require a reserve under ASC 740-10.

It determined that a reserve was required against federal and state research and development credits of $ 117 thousand and $ 118 thousand, respectively.

Management will continue to evaluate the need for reserves under ASC 740-10 in future reporting periods.

An income tax expense of $ 13 thousand was recorded for the three months ended December 31, 2023 compared to an income tax expense of $ 133 thousand in the same period of 2022.

The estimated annualized effective income tax rate for the three months ended December 31, 2023 was 23 %, excluding the impacts of the UK entity which continues to experience losses and maintains a full valuation allowance.

The difference between our effective income tax rate and the U.S.

federal statutory rate is the impact of state taxes and tax credits that we expect to be able to utilize against federal and state taxes.

The effective tax rate for the three months ended December 31, 2023 was also 23 %, excluding the UK as previously mentioned, as there were no discrete tax items recorded during the period.

The income tax expense for the three months ended December 31, 2022 was primarily driven by minimum state tax expenses and the required capitalization of R&D expenses under IRC Section 174, offset by the use of federal NOL and R&D credits.

For the three months ended December 31, 2022, we used the discrete method to arrive at tax expense due to the full valuation allowance against our deferred tax assets and cumulative loss position.

While the Company had maintained a full valuation allowance, we had been using the discrete effective tax rate method to calculate income taxes for the purposes of quarterly reporting.

Now that the valuation allowance has been reduced, the Company has resumed using the annualized effective tax rate method to calculate income taxes as prescribed under ASC 740 and has done so for the period ending December 31, 2023.

Accumulated Other Comprehensive Loss

12 unchanged sentences

unobservable inputs (e.g., a reporting entity’s or other entity’s own data)

The Company had no assets or liabilities measured at fair value on a recurring (except our pension plan assets and whole life insurance policies, see Note 11 for pension plan assets) or non-recurring basis as of June 30, 2023 or September 30, 2022.

To estimate fair value of the financial instruments below, quoted market prices are used when available and classified within Level 1.

If this data is not available, we use observable market-based inputs to estimate fair value, which

are classified within Level 2.

The Company had no assets or liabilities measured at fair value on a recurring (except our pension plan assets and whole life insurance policies, see Note 10 Pension and retirement plans for pension plan assets) or non-recurring basis as of December 31, 2023 or September 30, 2023.

To estimate the fair value of the financial instruments below, quoted market prices are used when available and classified within Level 1.

If this data is not available, we use observable market-based inputs to estimate fair value, which are classified within Level 2.

If the preceding information is unavailable, we use internally generated data to estimate fair value which is classified within Level 3.

As of June 30, 2023

As of December 31, 2023

As of September 30, 2023

5 unchanged sentences

Condensed Consolidated Balance Sheets

Accounts and long-term receivable*

Accounts receivable

Condensed Consolidated Balance Sheets

Financing receivables

Accounts payable and accrued expenses and other long-term liabilities*

Line of Credit

Notes payable

*Original maturity over one year

Cash and cash equivalents

Carrying amount approximated fair value.

Accounts and long-term receivable with original maturity over one year

Financing receivables with original maturity over one year

Fair value was estimated by discounting future cash flows based on the current rate with similar terms.

3 unchanged sentences

No interest accrues under the inventory line of credit when advances are paid within terms.

Notes Payable

Fair value was estimated by discounting future cash flows based on the current rate the Company could get in another transaction with similar terms based on historical information.

Fair value of accounts receivable with an original maturity of one year or less and accounts payable was not materially different from their carrying values as of June 30, 2023 and September 30, 2022.

Fair value of accounts receivable with an original maturity of one year or less and accounts payable was not materially different from their carrying values as of December 31, 2023 and September 30, 2023.

Segment Information

The following tables present certain operating segment information for the three and nine months ended June 30, 2023 and 2022.

Technology Solutions Segment

Three months ended June 30,

(Amounts in thousands)

Operating (loss) income

Interest expense

Interest income

Capital expenditures

Depreciation and amortization

Operating (loss) income

Interest expense

Interest income

Capital expenditures

Depreciation and amortization

The following tables present certain operating segment information for the three months ended December 31, 2023 and 2022.

Technology Solutions Segment

Nine months ended June 30,

Three months ended December 31,

(Amounts in thousands)

9 unchanged sentences

Depreciation and amortization

Operating income (loss) consists of sales less cost of sales, engineering and development expenses, and selling, general and administrative expenses but is not affected by either other income (expense) or by income tax expense (benefit).

Non-operating expenses/income consists principally of interest income from transactions with payment terms exceeding one year (see Note 6, “Accounts and Long-Term Receivable” for details) and interest income from money market accounts in fiscal year 2023 year as interest rates have increased significantly, and interest expense primarily from multi-year agreements with vendors (see Note 9, “Accounts payable and other noncurrent liabilities”).

Operating income (loss) from operations consists of sales less cost of sales, engineering and development expenses, and Selling, general and administrative expenses but is not affected by either other income/expense or by income taxes expense (benefit).

Non-operating expenses/income consists principally of interest income from transactions with payment terms exceeding one year (see Note 5, Financing receivables, net for details), interest income from cash and cash equivalents, and interest expense.

All intercompany transactions have been eliminated.

The following table lists customers from which the Company derived revenues of 10% or more of total revenues for the three and nine months ended June 30, 2023 and 2022.

Three months ended June 30,

Nine months ended June 30,

The following table lists customers from which the Company derived revenues of 10% or more of total revenues for the three months ended December 31, 2023 and 2022.

Three months ended December 31,

(in millions)

(Amounts in millions)

One customer, not listed above, had a balance of $ 12.2 million, or 38 %, of total consolidated accounts receivable and long-term receivable as of June 30, 2023 and a balance of $ 15.8 million, or 52 %, of total consolidated accounts receivable and long-term receivable as of September 30, 2022.

There were no other customers with more than 10% of total consolidated accounts receivable and long-term receivable as of June 30, 2023.

We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with any customers as of June 30, 2023.

On December 6, 2022, the Company’s board of directors declared a cash dividend of $ 0.03 per share which was paid on January 6, 2023 to shareholders of record as of December 21, 2022, the record date.

On February 8, 2023, the Company’s board of directors declared a cash dividend of $ 0.03 per share which was paid on March 14, 2023 to shareholders of record as of February 24, 2023, the record date.

On May 10, 2023, the Company’s board of directors declared a cash dividend of $ 0.04 per share which was paid on June 13, 2023 to shareholders of record as of May 25, 2023, the record date.

One customer as of December 31, 2023 had a balance of $ 1.2 million, or 10 %, of accounts receivable.

There was no customer with 10% or more of accounts receivable as of September 30, 2023.

Customer D had a balance of $ 1.3 million, or 13 %, of financing receivables and $ 1.5 million, or 13 %, as of December 31, 2023 and September 30, 2023, respectively.

Another customer had a balance of $ 6.1 million, or 61 %, of financing receivables and $ 7.4 million, or 65 %, as of December 31, 2023 and September 30, 2023, respectively.

Another customer had a balance of $ 2.5 million, or 25 %, of financing receivables and $ 2.5 million, or 13 %, as of December 31, 2023 and September 30, 2023, respectively.

There was no other customer with 10% or more of financing receivables as of December 31, 2023 or September 30, 2023.

On December 12, 2023, the Company’s board of directors declared a dividend of $ 0.04 per share payable January 9, 2024, to shareholders of record on the close of business on December 22, 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements