CSP INC /MA/

CSP Inc. operates in two segments: Technology Solutions (TS) and High Performance Products (HPP). The TS segment, through its wholly-owned Modcomp, Inc. subsidiary, operates in the United States and the United Kingdom, reselling third-party computer hardware and software as a value-added reseller and delivering professional services for complex IT solutions including advanced security, unified communications, wireless and mobility, data center solutions, and network solutions, as well as managed IT services primarily serving the small and mid-sized business market. The HPP segment generates revenue from three product lines: the ARIA Software-Defined Security cybersecurity solution offered to commercial, OEM, and government customers; the Myricom network adapters and related software for commercial, government, and OEM customers; and the legacy Multicomputer product portfolio for digital signal processing applications within the defense markets. The ARIA SDS solution is a software portfolio comprised of three products: ARIA Packet Intelligence software, ARIA Advanced Detection and Response solution, and ARIA Zero Trust PROTECT, which was introduced in July of 2023 and designed to stop sophisticated attacks on critical infrastructure applications. The ARIA portfolio is of value to regulated industries such as manufacturing, pharmaceuticals, financial services, energy production, utilities, transportation, and healthcare due to the rise of critical infrastructure regulations. The Myricom SmartNIC adapters (ARC Series and Secure Intelligent Adapters) are optimized for markets requiring high-bandwidth and low-latency including packet capture, financial transactions, machine vision, and network security, though the ARC series has reached end of life due to ASIC supplier problems. Multicomputer products for DSP applications are no longer actively developed but will continue to be sold into established programs through fiscal year 2025 and supported for several years via repair services.

Primary competitors in the TS segment include other VARs ranging from small companies to large enterprises such as CDW, PC Connection, Insight, Presidio, Dimension Data, and Computacenter Limited, as well as manufacturers like Cisco Systems, IBM, HPE, and EMC (now part of Dell). In the network management, security, and storage systems integration services business, competitors include HP/EDS, IBM, and Cap Gemini. Favorable competitive factors for the TS segment include procurement capability, product diversity enabling delivery of complete and custom solutions, strength of key business relationships with major IT OEMs, ability to meet unique needs of SMB and LEB markets, strong knowledge of IT products, and ability to provide managed services through the network operations center and professional IT services. Unfavorable competitive factors include low name recognition, limited geographic coverage, and pricing. In the HPP segment, CSPi's competition in the cybersecurity space comes primarily from large traditional security vendors like Palo Alto, VMware, and security services providers like Arctic Wolf.

The TS segment generates product revenues by reselling third-party computer hardware and software as a value-added reseller and generates service revenues through delivery of professional services for complex IT solutions, including advanced security, unified communications and collaboration, wireless and mobility, data center solutions, and network solutions, as well as managed IT services that primarily serve the SMB market. Third-party products and professional services are marketed and sold through the Company's direct sales force into a variety of vertical markets including automotive, defense, healthcare, education, federal, state and local government, and maritime. The HPP segment derives revenue from license sales of software platform components, support packages, and any required supporting services, with software licenses, support packages, and supporting services renewable on a recurring basis. The ARIA SDS and ADR solution is targeted at organizations needing additional functionality from current cybersecurity solutions to find and stop attacks while reducing operating costs, and is primarily offered through direct sales channel, though with ARIA AZT PROTECT's introduction the Company has begun to add channel partners such as independent resellers. OEM vendors in the cybersecurity market can benefit from integrating ARIA applications, and MSSPs require simple yet differentiated solutions that can be deployed across customer bases.

For the fiscal year ended September 30, 2025, the TS segment generated total sales of $56.808 million ¹, representing 97% ² of total Company sales, compared to $51.065 million ³ and 92% ⁴ in the prior year. The TS segment revenue increased by approximately $5.7 million ⁵ consisting of an increase of $5.5 million ⁶ in the U.S. division combined with an increase of $0.2 million ⁷ in the U.K. division. TS segment products revenue increased by $3.0 million ⁸ during the period, resulting from a $2.8 million ⁹ increase in the U.S. division combined with an increase of $0.2 million ¹⁰ in the U.K. division. TS segment services revenue increased by $2.7 million ¹¹ as compared to the prior year, entirely in the U.S. division due to an increase of $1.3 million ¹² in third-party maintenance revenue, an increase of $1.1 million ¹³ in internal and third party services, and an increase of $0.3 million ¹⁴ in managed services. The TS segment gross margin as a percentage of revenue decreased to 31% ¹⁵ in fiscal year 2025 from 32% ¹⁶ in fiscal year 2024. TS segment product gross margin as a percentage of revenue decreased 2% ¹⁷ for fiscal year 2025 compared to the prior year due to higher volume of sales to certain customers with lower margins. TS segment service gross margin as a percentage of revenue remained flat at 59% ¹⁸ in fiscal year 2025. The gross backlog of customer orders and contracts for the TS segment was approximately $7.1 million ¹⁹ as of September 30, 2025 compared to $4.9 million ²⁰ as of September 30, 2024.

For the fiscal year ended September 30, 2025, the HPP segment generated total sales of $1.922 million ²¹, representing 3% ²² of total Company sales, compared to $4.154 million ²³ and 8% ²⁴ in the prior year. The HPP segment revenue decreased by approximately $2.2 million ²⁵ or 54% ²⁶. The decrease in HPP products revenue of $2.1 million ²⁷ was primarily the result of decreased ARIA AZT revenue of $1.7 million ²⁸ combined with decreased Myricom revenue of $0.4 million ²⁹. The ARIA revenue decrease was due to one large nonrecurring ARIA AZT software license sale of $2.0 million ³⁰ in the prior year, partially offset by increased total ARIA AZT software license sales of $0.3 million ³¹. The decreased Myricom revenue was primarily due to one large nonrecurring transaction in the prior year. The decrease in HPP services revenue of approximately $0.1 million ³² was primarily the result of a $0.3 million ³³ decrease in repairs revenue and a $0.2 million ³⁴ decrease in royalty revenues on high-speed processing boards related to the E2D program, partially offset by an increase in Multicomputer revenue of $0.2 million ³⁵ and increased ARIA revenue of $0.2 million ³⁶. The overall HPP segment gross margin as a percentage of revenue decreased to 46% ³⁷ in fiscal year 2025 from 65% ³⁸ in fiscal year 2024. The gross margin as a percentage of sales from products decreased 26% ³⁹ primarily due to a nonrecurring prior year large ARIA AZT software license sale which was nearly all gross margin. The gross margin as a percentage of sales from services decreased 9% ⁴⁰ primarily due to decreased Multicomputer royalty revenues, which is nearly all gross margin and recorded as service revenue. The gross backlog of customer orders and contracts in the HPP segment was $1.0 million ⁴¹ as of September 30, 2025 as compared to $0.8 million ⁴² as of September 30, 2024.

During the fiscal year ended September 30, 2025, the Company repurchased 19,500 ⁴³ shares of common stock at an average price of $11.98 ⁴⁴ per share under the stock repurchase program authorized on February 8, 2011, which authorizes the repurchase of up to 500 thousand ⁴⁵ additional shares and does not expire. As of September 30, 2025, 272,354 ⁴⁶ shares remained available for repurchase under the plan. The Company paid cash dividends of $0.030 ⁴⁷ per share in each of the four quarters of fiscal year 2025, totaling $1.188 million ⁴⁸ in dividends paid. In October 2024, in connection with the planned termination of the defined benefit pension plan in the U.K., the Company paid 8.5 million ⁴⁹ British pounds to enter into a buy-in contract, with the expected timeframe of the buy-in contract turning into a buy-out contract within fiscal year 2026. The Company maintained a line of credit with a capacity of up to $15.0 million ⁵⁰ for inventory accessible to both segments, with $14.1 million ⁵¹ available as of September 30, 2025. The last note payable was paid in full in fiscal year 2025 of $0.4 million ⁵² and no notes remain outstanding as of September 30, 2025. There is a total of $5.3 million ⁵³ due to vendors with financing agreements outstanding as of September 30, 2025, including $3.5 million ⁵⁴ payments to be made in the next 12 months. There is a total of $16.3 million ⁵⁵ due to the Company of customer financing agreements outstanding as of September 30, 2025, including $9.9 million ⁵⁶ to be received in the next 12 months. The Company's research and development expenses were $3.3 million ⁵⁷ for fiscal year 2025 compared to $3.0 million ⁵⁸ for fiscal year 2024.

Total revenue increased by approximately $3.5 million ⁵⁹, or 6% ⁶⁰, to $58.730 million ⁶¹ for the fiscal year ended September 30, 2025 compared to $55.219 million ⁶² for the fiscal year ended September 30, 2024. Gross profit margin percentage decreased to 32% ⁶³ for fiscal year 2025 compared to 34% ⁶⁴ for fiscal year 2024. The Company generated an operating loss of $(3.109) million ⁶⁵ for fiscal year 2025 as compared to an operating loss of $(1.872) million ⁶⁶ for fiscal year 2024. Other income, net was consistent at approximately $1.5 million ⁶⁷ for both fiscal years. The Company recorded an income tax benefit of $(1.570) million ⁶⁸, which reflected an effective tax rate of 94.5% ⁶⁹, for fiscal year 2025 compared to an income tax benefit of $(0.093) million ⁷⁰, which reflected an effective tax rate of 22.2% ⁷¹ for fiscal year 2024. Net loss was $(0.091) million ⁷² for fiscal year 2025 compared to $(0.326) million ⁷³ for fiscal year 2024. Cash and cash equivalents decreased by $3.2 million ⁷⁴ to $27.418 million ⁷⁵ as of September 30, 2025 from $30.585 million ⁷⁶ as of September 30, 2024. Net cash provided by operating activities was $2.268 million ⁷⁷ for fiscal year 2025 compared to $4.213 million ⁷⁸ for the prior year.

The Company's focus for fiscal year 2026 and beyond is to expand from initial successes more broadly into the manufacturing market and its various sub segments. The ARIA AZT PROTECT product is believed to be well suited to address a critical security gap in the energy/utility market, though sales cycles can be up to 1 year ⁷⁹. The Company expects to continue to make investments related to the development of new cybersecurity software applications. The ARIA AZT PROTECT product was designed to fill a gap in the market by stopping the most sophisticated attacks used to attack critical infrastructure applications before harm can be done, and the product is deployed and generating revenue from its initial contracts. The Company has begun selling its unique solution into MSSPs that want to offer a lower cost, more effective service at detecting today's widening range of cyber-attacks. The Company expects to continue to make investments related to the development of new cybersecurity software applications.

The filing does not contain a separate dedicated paragraph on margin and cost outlook beyond the historical margin trends and the expectation that spending as a percent of revenues may fluctuate in the future due to the commitment to invest in R&D.

The Company expects to continue to make investments related to the development of new cybersecurity software applications. The Company's research and development expenses were $3.3 million ⁸⁰ for fiscal year 2025 compared to $3.0 million ⁸¹ for fiscal year 2024. The Company expects to continue to make investments related to the development of new cybersecurity software applications. The Company's focus for fiscal year 2026 and beyond is to expand from initial successes more broadly into the manufacturing market and its various sub segments. The ARIA AZT PROTECT product is believed to be well suited to address a critical security gap in the energy/utility market, though sales cycles can be up to 1 year ⁸².

The Company expects to continue to make investments related to the development of new cybersecurity software applications. Research and development expenses were $3.3 million ⁸³ for fiscal year 2025 compared to $3.0 million ⁸⁴ for fiscal year 2024. The Company's line of credit has a capacity of up to $15.0 million ⁸⁵ for inventory accessible to both segments. The Company paid cash dividends of $0.030 ⁸⁶ per share in each of the four quarters of fiscal year 2025, totaling $1.188 million ⁸⁷ in dividends paid. The Company repurchased 19,500 ⁸⁸ shares of common stock at an average price of $11.98 ⁸⁹ per share during the three months ended September 30, 2025, and as of September 30, 2025, 272,354 ⁹⁰ shares remained available for repurchase under the plan authorized on February 8, 2011, which authorizes the repurchase of up to 500 thousand ⁹¹ additional shares and does not expire.

The ARC series of Myricom SmartNIC adapters has reached end of life due to ASIC supplier problems which will significantly reduce its contribution to the HPP line of business. The revenue from Multicomputer products for DSP applications, as a percentage of overall Company revenue, is expected to continue to decline over time. The Company's international operation is subject to risks including changes in applicable laws and regulatory requirements, export and import restrictions, export controls relating to technology, tariffs and other trade barriers, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, expatriation controls and potential adverse tax consequences. Beginning in the second quarter of 2025, new U.S. Tariffs were announced, including additional tariffs on imports from China, India, Japan, South Korea, Taiwan, Vietnam and the EU, among others, and the U.S. Department of Commerce has initiated an investigation under Section 232 of the Trade Expansion Act of 1962 into imports of semiconductors, semiconductor manufacturing equipment, and their derivative products, including downstream products that contain semiconductors. These tariffs do not currently include software, services, intangibles, and other digital services, but the Company cannot predict future trade policy or tariffs.

The global economy has been negatively impacted by the military conflict between Russia and Ukraine, and although the Company does not have significant customers or suppliers in Russia or Ukraine, it does have customers and suppliers in surrounding regions which may be affected. Further escalation of Russian-Ukraine military conflict and geopolitical tensions could result in cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets. The global economy has also been negatively impacted by the military conflict between Israel and Hamas, and although the Company does not have significant customers or suppliers in the Middle East region, it does have customers and suppliers in surrounding regions which may be affected. Violation of the peace process may lead to renewed military conflict and/or escalation of the Israel and Hamas conflict and geopolitical tensions, which could result in cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets.

The Company depends on a small number of customers for a significant portion of its revenue, and the loss of any customer could significantly affect the business, though for fiscal years 2025 and 2024 no one customer accounted for 10% or more of total revenues ⁹². The Company has made significant investments in ARIA cyber security products and services that may not achieve expected returns, and commercial success depends on many factors including innovativeness, developer support, and effective distribution and marketing. The ARC series of Myricom SmartNIC adapters has reached end of life due to ASIC supplier problems which will significantly reduce its contribution to the HPP line of business. The Company's international operations are subject to risks including changes in laws, export controls, tariffs, and currency fluctuations, with foreign-based revenue representing 10% ⁹³ and 12% ⁹⁴ of total revenue for fiscal years 2025 and 2024 respectively. Beginning in the second quarter of 2025, new U.S. Tariffs were announced including additional tariffs on imports from China, India, Japan, South Korea, Taiwan, Vietnam and the EU, among others, and the U.S. Department of Commerce has initiated an investigation under Section 232 into imports of semiconductors and their derivative products, which could materially adversely affect the Company's business, results of operations, financial condition and stock price.

Management's discussion and analysis of financial condition and results of operations notes that revenue increased by approximately $3.5 million ⁹⁵, or 6% ⁹⁶, to $58.7 million ⁹⁷ for fiscal year 2025 compared to $55.2 million ⁹⁸ for fiscal year 2024, while gross profit margin percentage decreased to 32% ⁹⁹ from 34% ¹⁰⁰. The Company generated an operating loss of $(3.1) million ¹⁰¹ for fiscal year 2025 as compared to an operating loss of $(1.9) million ¹⁰² for fiscal year 2024. Other income, net was consistent at approximately $1.5 million ¹⁰³ for both fiscal years. The Company recorded an income tax benefit of $(1.6) million ¹⁰⁴, which reflected an effective tax rate of 94.5% ¹⁰⁵, for fiscal year 2025 compared to an income tax benefit of $(0.1) million ¹⁰⁶, which reflected an effective tax rate of 22.2% ¹⁰⁷ for fiscal year 2024. Management states that based on current plans and business conditions, the Company's available cash and cash equivalents, cash generated from operations, and availability on the line of credit will be sufficient to provide for working capital and capital expenditure requirements for at least 12 months from the date of the filing. The strategic priorities emphasized include expanding from initial successes more broadly into the manufacturing market and its various sub segments for fiscal year 2026 and beyond, continuing to make investments related to the development of new cybersecurity software applications, and focusing on the ARIA AZT PROTECT product which is believed to be well suited to address a critical security gap in the energy/utility market.