CSPI 10-K & 10-Q changes, risk factors and insider trading
Csp Inc. · Nasdaq · Services-Computer Integrated Systems Design · CIK 356037 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
New heading “Significant political, trade, regulatory developments, and other circumstances beyond our control, could have a material adverse effect on our financial condition or results of operations.”
Removed heading “Government Contracting Risks”
Removed heading “During certain fiscal years, we may depend on contracts with the federal government, primarily with the Department of Defense ("DoD"), for a portion of our revenue, and our business could be seriously harmed if the government significantly decreased or ceased doing business with us.”
Removed heading “Our business could be adversely affected by changes in budgetary priorities of the federal government.”
Removed heading “U.S. Federal government contracts contain numerous provisions that are unfavorable to us.”
Largest changes
“Significant political, trade, or regulatory developments in the jurisdictions in which we sell or purchase our products, including country of origin of such products, are difficult to predict and may create periods of volatility in such markets which may have a material adverse effect on us. Recent changes in U.S. federal policy that affect the geopolitical landscape could give rise to circumstances outside our control that could have negative impacts on our business operations. Beginning in the second quarter of 2025, new U.S. …”see in full comparison
“During certain fiscal years, we may depend on contracts with the federal government, primarily with the Department of Defense ("DoD"), for a portion of our revenue, and our business could be seriously harmed if the government significantly decreased or ceased doing business with us.”see in full comparison
“If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may be unable to recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated.”see in full comparison
“Significant political, trade, regulatory developments, and other circumstances beyond our control, could have a material adverse effect on our financial condition or results of operations.”see in full comparison
We are required to maintain internal control over financial reporting and to assess and report on the effectiveness of those controls. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our management concluded that our internal control over financial reporting wassee in full comparisonineffectiveeffective as of September 30,2024, and identified certain material weaknesses in our internal controls. While management is working to remediate the material weaknesses, there is no assurance that such changes will remediate the identified material weaknesses or that the controls will prevent or detect future material weaknesses.2025. If we are not able to maintain effective internal control over financial reporting, our financial statements, including related disclosures, may be inaccurate, which could have a material adverse effect on ourbusinessbusiness.
“Our business could be adversely affected by changes in budgetary priorities of the federal government.”see in full comparison
Full comparison: every changed paragraph (27)
Both the HPP and TS segments are reliant upon a small number of significant customers, and the loss of or significant reduction in sales to any one of which could have a material adverse effect on our business. For the fiscal yearyears ended September 30, 20242025 and 20232024, no one customer accounted for 10% or more of our total revenues for the fiscal year.revenues. Our revenues are largely dependent upon the ability of our customers to continue to grow or need services or to develop and sell products that incorporate our products. No assurance can be given that our customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our results of operations.
Highly complex products, such as those we offer, may contain defects and bugs when they are first introduced or as new versions, software documentation or enhancements are released, or their release may be delayed due to unforeseen difficulties during product development. If any of our products or third-party components used in our products contain defects or bugs, or have reliability, quality or compatibility problems, we may not be able to successfully design workarounds.workarounds or corrections. Furthermore, if any of these problems are not discovered until after we have commenced commercial production or deployment of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. Significant technical challenges also arise with our software products because our customers license and deploy our products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. As a result, if there is system-wide failure or an actual or perceived breach of information integrity, security or availability occurs in one of our end-user customer’s system, it can be difficult to determine which product is at fault and we could ultimately be harmed by the failure of another supplier’s product. Consequently, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. To resolve these problems, we may have to invest significant capital and other resources and we would likely lose, or experience a delay in, market acceptance of the affected product or products. These problems may also result in claims against us by our customers or others. For example, if a delay in the manufacture and delivery of our products causes the delay of a customer’s end-product delivery, we may be required, under the terms of our agreement with that customer, to compensate the customer for the adverse effects of such delays. As a result, our financial results could be materially adversely affected.
We market and sell our products in certain international markets and we have established operations in the U.K. Foreign-based revenue is determined based on the location to which the product is shipped or services are rendered and represented 3%10% and 3%12% of our total revenue for the fiscal years ended September 30, 20242025 and 2023,2024, respectively. If revenues generated by foreign activities are not adequate to offset the expense of establishing and maintaining these foreign activities, our business, financial condition and results of operations could be materially adversely affected. In addition, there are certain risks inherent in transacting business internationally, such as 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, any of which could adversely impact the success of our international activities. In particular, it is possible activity in the United Kingdom and the rest of Europe will be adversely impacted and that we will face increased regulatory and legal complexities, including those related to tax, trade, data protection, and employee relations as a result of Brexit.Brexit and evolving international regulations. A portion of our revenues are from sales to foreign entities, including foreign governments, which are primarily paid in the form of foreign currencies. There can be no assurance that one or more of such factors will not have a material adverse effect on our future international activities and, consequently, on our business, financial condition or results of operations.
There can be no assurance that one or more of such factors will not have a material adverse effect on our future international activities and, consequently, on our business, financial condition or results of operations.
Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (“COVID-19”),outbreaks may materially adversely affect our business, results of operations, cash flows and financial condition.
Pandemics, epidemics, or disease outbreaks, such as COVID-19 may cause harm to us, our employees, our clients, our vendors and supply chain partners, and financial institutions, which could have a material adverse effect on our business, results of operations, cash flows, and financial condition. The impact of a pandemic, epidemic, or other disease outbreak, such as COVID-19,outbreak may include, but would not be limited to: (i) disruption to operations due to the unavailability of employees due to illness, quarantines, risk of illness, travel restrictions or factors that limit our existing or potential workforce; (ii) volatility in the demand for or availability of our products and services, (iii) inability to meet our customers’ needs due to disruptions in the manufacture, sourcing and distribution of our products and services, or (iv) failure of third parties on which we rely, including our suppliers, clients, and external business partners, to meet their obligations to us, or significant disruptions in their ability to do so.
Government Contracting Risks
During certain fiscal years, we may depend on contracts with the federal government, primarily with the Department of Defense ("DoD"), for a portion of our revenue, and our business could be seriously harmed if the government significantly decreased or ceased doing business with us.
We derived below 1% of our total revenue in fiscal year 2024 and 5% of our total revenue in fiscal year 2023 from the DoD as a subcontractor. Although we only derived 1% of our total revenue in fiscal year 2024, we expect that the DoD contracts to continue to be important to our business for the foreseeable future. If we were suspended or debarred from contracting with the federal government generally, the General Services Administration, or any significant agency in the intelligence community or the DoD, if our reputation or relationship with government agencies were to be impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially and adversely affected.
Our business could be adversely affected by changes in budgetary priorities of the federal government.
Because we derive a significant percentage of our revenue from contracts with the federal government, changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts.
In years when Congress does not complete its budget process before the end of its fiscal year (September 30), government operations are funded through a continuing resolution ("CR") that temporarily funds federal agencies. Recent CRs have generally provided funding at the levels provided in the previous fiscal year and have not authorized new spending initiatives. When the federal government operates under a CR, delays can occur in the procurement of products and services. Historically, such delays have not had a material effect on our business; however, should funding of the federal government by CR be prolonged or extended, it could have significant consequences for our business and our industry.
Additionally, our business could be seriously affected if changes in DoD priorities reduces the demand for our services on contracts supporting some operations and maintenance activities or if we experience an increase in set-asides for small businesses, which could result in our inability to compete directly for contracts.
U.S. Federal government contracts contain numerous provisions that are unfavorable to us.
U.S. Federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies, some of which are not typically found in commercial contracts, including allowing the government to:
If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may be unable to recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated.
As is common with government contractors, we have experienced and continue to experience occasional performance issues under certain of our contracts. Depending upon the value of the matters affected, a performance problem that impacts our performance of a program or contract could cause our actual results to differ materially and adversely from those anticipated.
We have experienced fluctuations in operating results in large part due to the sale of products and services in relatively large dollar amounts to a relatively small number of customers. Customers specify delivery date requirements that coincide with their need for our products and services. Because these customers may use our products and services in connection with a variety of defense programs or other projects with different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer. As such, we have not been able in the past to consistently predict when our customers will place orders and request shipments so that we cannot always accurately plan our manufacturing, inventory, and working capital requirements. As a result, if orders and shipments differ from what we predict, we may incur additional expenses and build excess inventory, which may require additional reserves and allowances and reduce our working capital and operational flexibility. Any significant change in our customers’ purchasing patterns could have a material adverse effect on our operating results and reported earnings per share for a particular quarter. Thus, results of operations in any period should not be considered indicative of the results to be expected for any future period.
If we experience a local or regional disaster or other business continuity problem, such as a hurricane, earthquake, terrorist attack, pandemic or other natural or man-madehuman-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. As we grow our operations, the potential for particular types of natural or man-madehuman-made disasters, political, economic or infrastructure instabilities, or other country- or region-specific business continuity risks increases.
Any systems failures, including network, software or hardware failures, whether caused by us, a third partythird-party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortages or terrorist attacks, could cause loss of data or interruptions or delays in our business or that of our clients and reputational harm as a security provider. Like other companies, we have experienced cyber security threats to our data and systems, our company sensitive information, and our information technology infrastructure, including malware and computer virus attacks, unauthorized access, systems failures and temporary disruptions. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. Prior cyber attacks directed at us have not had a material adverse impact on our business or our financial results, and we believe that our continuing commitment toward threat detection and mitigation processes and procedures will help us minimize or avoid such impact in the future. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.
Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Israel and Hamas.
The global economy has been negatively impacted by the military conflict between Israel and Hamas. There could be an expansion of the countries involved, which could lead to significant detrimental effects to the global economy. Although we do not have significant customers or suppliers in the Middle East region, we do have customers and suppliers in surrounding regions which may be affected. FurtherViolation of the peace process may lead to to renewed military conflict and/or escalation of the Israel and Hamas conflict and geopolitical tensions related to such military conflict,conflict and/or escalation, including increased trade barriers or restrictions on global trade, could result in, among other things, cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business, financial condition and results of operations. The effects of the ongoing conflict could heighten many of our known risks described in these "Risk Factors.”
Significant political, trade, regulatory developments, and other circumstances beyond our control, could have a material adverse effect on our financial condition or results of operations.
Significant political, trade, or regulatory developments in the jurisdictions in which we sell or purchase our products, including country of origin of such products, are difficult to predict and may create periods of volatility in such markets which may have a material adverse effect on us. Recent changes in U.S. federal policy that affect the geopolitical landscape could give rise to circumstances outside our control that could have negative impacts on our business operations. 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. In response, several countries have imposed, or threatened to impose, reciprocal tariffs on imports from the U.S. and other retaliatory measures. Various modifications and delays to the U.S. Tariffs have been announced and further changes are expected to be made in the future, which may include additional sector-based tariffs or other measures. For example, the U.S. Department of Commerce has initiated an investigation under Section 232 of the Trade Expansion Act of 1962, as amended, into, among other things, 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; however, we cannot predict future trade policy or tariffs, including the impact or timing thereof, or whether such services will be subject to any form of tariffs or other restrictions in the future. The ultimate impact remains uncertain and will depend on several factors, including whether additional or incremental U.S. Tariffs or other measures are announced or imposed, to what extent other countries implement tariffs or other retaliatory measures in response, and the overall magnitude and duration of these measures. If disputes and conflicts further escalate, actions by governments in response could be significantly more severe and restrictive. Any of the foregoing could materially adversely affect the Company’s business, results of operations, financial condition and stock price.
Legal and Regulatory Risks.Risks
We are required to maintain internal control over financial reporting and to assess and report on the effectiveness of those controls. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our management concluded that our internal control over financial reporting was ineffectiveeffective as of September 30, 2024, and identified certain material weaknesses in our internal controls. While management is working to remediate the material weaknesses, there is no assurance that such changes will remediate the identified material weaknesses or that the controls will prevent or detect future material weaknesses.2025. If we are not able to maintain effective internal control over financial reporting, our financial statements, including related disclosures, may be inaccurate, which could have a material adverse effect on our businessbusiness.
As of September 30, 2024, we discovered material weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
Management's Discussion & Analysis (MD&A)
New heading “Results of Operations”
Largest changes
“Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. …”see in full comparison
see in full comparisonOur TS segment revenue decreased by approximately $6.7 million consisting of a decrease of $6.6 million in our U.S. division combined with a decrease of $0.1 million in our U.K. division.Thedecreaseincrease in TS segmentproductproducts revenue of$7.5$3.0 million during the period was the result of a$7.4$2.8 milliondecreaseincrease in the U.S. division combined withaandecreaseincrease of$0.1$0.2 million in the U.K. division.Interest rates were relatively high compared to prior years in fiscal year 2024 along with inflation which caused economic uncertainty and some reduced customer spending on products.Thedecreaseincrease in our U.S. division product revenue year over year was primarily associated with several existing majorcustomers,customerspartiallyasoffsetwellbyasan increase with severalone newmajor customers and existing customers.customer. Thedecreaseincrease in the U.K. division year over year was primarily associated with two major existing customers.The increase in TS segment service revenue of $0.8 million as compared to the prior year was in the U.S. division. In fiscal year 2024 as compared to the prior year, the U.S. division had an increase of $1.1 million in third party maintenance revenue, an increase of $0.4 million in managed services, partially offset by a decrease of $0.7 million in internal services.
Our cash held by our foreign subsidiary in the United Kingdom totaled the equivalent of approximatelysee in full comparison$5.4$4.9 million as of September 30,2024,2025, which consisted of0.40.6 millionEuros,euros,0.30.4 million BritishPounds,pounds, and4.73.6 million U.S.Dollars.dollars. This cash is included in our total cash and cash equivalents reported within our financial statements. Due to the pension obligation in the U.K., we maintain a large balance of cash in the U.K.SubsequentIn October 2024, in connection with the planned termination of our defined benefit pension plan in the U.K., we paid 8.5 million British pounds toSeptemberenter30,into2024,a buy-in contract. This payment is subject to adjustment as a result of subsequent data cleansing activities. Under theU.K.termspensionofassets,thisexcludingbuy-incash,contract,weretheallinsurerconvertedisinto cashliable tosellpay theU.K. pension obligation. Asbenefits of thedateplan,ofbutthisthefiling,Companytherestillisretainsanfullagreementlegal responsibility tosellpay thepensionbenefitsobligationtoinmembersfull.using the insurance payments. This agreement hasmanycontingencies and the expected timeframe of thesalebuy-inoccurringcontract turning into a buy-out contract is4withintofiscal16yearmonths from the date of this filing.2026.
“A subsequent review of qualified wages for the Employee Retention Credit was performed during the preparation of the tax provision for fiscal year 2023 and it was determined $0.6 million of the money received did not qualify and was paid back to the Internal Revenue Service (IRS) except for $11k, which is still owed to the IRS as of September 30, 2024. This $0.6 million was included in Cash and cash equivalents as of September 30, 2023. However, this amount was not recognized in net income in the Consolidated statements of operations for the fiscal year ended September 30, 2023. …”see in full comparison
As of September 30,see in full comparison20242025 and September 30,2023,2024, the Company maintained a line of credit with a capacity of up to $15.0 million for inventory accessible to both the HPP and TS segments. This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million. Amounts of$10.2$14.1 million and$13.5$10.8 million were available as of September 30,20242025 and September 30,2023,2024, respectively. As of September 30,20242025 andSeptember 30, 20232024 there were no cash withdrawals outstanding.For a further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 12 Line of Credit.
Full comparison: every changed paragraph (50)
This management’s discussion and analysis of financial condition and results of operations and other portions of this filing contain forward-looking informationstatements that involvesinvolve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information.statements. You should review the “Special Note Regarding Forward Looking Statements” and “Risk Factors” sections of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The following discussion should be read in conjunction with our financial statements and the related notes included elsewhere in this filing.
As of September 30, 2024,2025, the Russian/Ukrainian military conflict and the Israeli-Hamas conflict have not had a direct or significant impact on revenue as we do not have any significant recurring customers in either region. However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of both conflicts and geopolitical tensions related to such conflicts could adversely affect our business, financial condition and results of operations, by among other things, cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets. It is not possible at this time to predict the size of the impact or consequences of the conflicts on the Company and our customers or suppliers.
Overview of Fiscal 2024Year Results of Operations2025
Results of Operations
Revenue increased by approximately $3.5 million, or 6%, to $58.7 million for the fiscal year ended September 30, 2025 compared to $55.2 million for the fiscal year ended September 30, 2024. Gross profit margin percentage decreased to 32% for the fiscal year ended September 30, 2025 compared to 34% for the fiscal year ended September 30, 2024. We generated an operating loss of $(3.1) million for the fiscal year ended September 30, 2025 as compared to an operating loss of $(1.9) million for the fiscal year ended September 30, 2024. Other income, net was consistent at approximately $1.5 million for the fiscal years ended September 30, 2025 and 2024. The Company recorded an income tax benefit of $(1.6) million, which reflected an effective tax rate of 94.5%, for the fiscal year ended September 30, 2025 compared to an income tax benefit of $(0.1) million, which reflected an effective tax rate of 22.2% for the fiscal year ended September 30, 2024.
Revenue decreased by approximately $9.4 million, or 15%, to $55.2 million for the fiscal year ended September 30, 2024 compared to $64.6 million for the fiscal year ended September 30, 2023.
Gross profit margin percentage remained consistent at 34% for the fiscal year ended September 30, 2024 and 2023.
We generated an operating loss of $(1.9) million for the fiscal year ended September 30, 2024 as compared to operating income of $1.9 million for the fiscal year ended September 30, 2023.
Other income, net was $1.5 million for the fiscal year ended September 30, 2024 as compared to $2.9 million for the prior year.
The Company recorded an income tax benefit of $(93) thousand, which reflected an effective tax rate of 22.2%, for the fiscal year ended September 30, 2024 compared to an income tax benefit of $(469) thousand, which reflected an effective tax rate of (9.9)% for the fiscal year ended September 30, 2023.
Revenue decreasedincreased by approximately $9.4$3.5 million, or approximately 15%,6%, to $58.7 million for the fiscal year ended September 30, 2025 compared to $55.2 million for the fiscal year ended September 30, 2024 compared to $64.6 million for the fiscal year ended September 30, 2023.2024.
Our TS segment revenue increased by approximately $5.7 million consisting of an increase of $5.5 million in our U.S. division combined with an increase of $0.2 million in our U.K. division.
Our TS segment revenue decreased by approximately $6.7 million consisting of a decrease of $6.6 million in our U.S. division combined with a decrease of $0.1 million in our U.K. division. The decreaseincrease in TS segment productproducts revenue of $7.5$3.0 million during the period was the result of a $7.4$2.8 million decreaseincrease in the U.S. division combined with aan decreaseincrease of $0.1$0.2 million in the U.K. division. Interest rates were relatively high compared to prior years in fiscal year 2024 along with inflation which caused economic uncertainty and some reduced customer spending on products. The decreaseincrease in our U.S. division product revenue year over year was primarily associated with several existing major customers,customers partiallyas offsetwell byas an increase with severalone new major customers and existing customers.customer. The decreaseincrease in the U.K. division year over year was primarily associated with two major existing customers. The increase in TS segment service revenue of $0.8 million as compared to the prior year was in the U.S. division. In fiscal year 2024 as compared to the prior year, the U.S. division had an increase of $1.1 million in third party maintenance revenue, an increase of $0.4 million in managed services, partially offset by a decrease of $0.7 million in internal services.
The increase in TS segment services revenue of $2.7 million as compared to the prior year was in the U.S. division due to an increase of $1.3 million in third-party maintenance revenue, an increase of $1.1 million in internal and third party services, and an increase of $0.3 million in managed services.
HPP segment revenue changes by productproducts and services for the fiscal years ended September 30, 20242025 and 20232024 were as follows:
Our HPP segment revenue decreased by approximately $2.2 million or 54%.
The decrease in HPP products revenue of $2.1 million in the fiscal year ended September 30, 2025 was primarily the result of decreased ARIA AZT revenue of $1.7 million combined with decreased Myricom revenue of $0.4 million. The ARIA revenue decrease was due to one large nonrecurring ARIA AZT software license sale of $2.0 million in the prior year, partially offset by increased total ARIA AZT software license sales of $0.3 million. 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 for the fiscal year ended September 30, 2025 compared to the same period for the prior year was primarily the result of a $0.3 million decrease in repairs revenue and a $0.2 million 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 and increased ARIA revenue of $0.2 million. ARIA AZT service revenue is from post contract support of the ARIA AZT software license and ARIA ADR revenue is all recorded to service revenue. The non-recurring AZT software license transaction discussed above was originally sold with annual post contract support, which was renewed in fiscal year 2025 for another year of service.
Our HPP segment revenue decreased by approximately $2.7 million or 40%. The decrease in HPP product revenue of $2.9 million in the fiscal year ended September 30, 2024 was primarily the result of two major non-recurring transactions of $1.8 million and $1.2 million in the prior year along with several other customers, partially offset by one major AZT sale in fiscal year 2024. The increase in HPP service revenue of approximately $0.2 million for the fiscal year ended September 30, 2024 was primarily the result of a $0.5 million increase in ARIA revenue, partially offset with a decrease of $0.3 million in royalty revenues on high-speed processing boards related to the E2D program as compared to the fiscal year ended September 30, 2023.
The $9.5$3.8 million decreaseincrease in the Americas revenue for the fiscal year ended September 30, 20242025 as compared to the fiscal year ended September 30, 20232024 was primarily due to decreasedincreased revenue by our TS-US division of $7.0$5.8 million,million decreasedcombined with increased revenue byin our TS-UK division of $0.1 million, andpartially offset by decreased revenue byin our HPP segment of $2.4$2.1 million. Sales to Europe decreasedincreased by $0.3$0.2 million primarily due to aan decreaseincrease by our HPP segment of $0.3 million. Sales to Europe in the TS segment remained flat with an increase in the TS-US division of $0.1 million,million offsetand withan aincrease decreaseof $0.1 million in the TS-UK division of $0.1 million.division. Sales to Asia-PacificAPAC increasedand $0.4Africa decreased $0.5 million due to a decrease of $0.4 million by the TS-US division.division and a decrease of $0.1 million in the HPP segment.
Our gross margin ("GM") decreased byto $3.1$18.5 million for fiscal year 2025 as compared to GM of $18.9 million for fiscal year 2024 as compared to GM of approximately $21.9 million for fiscal year 2023.2024. The total GM as a percentage of revenue remaineddecreased flatto at32% for fiscal year 2025 compared to 34% for fiscal year 2024 and 2023.2024.
The overall TS segment GM as a percentage of revenue increaseddecreased to 31% in fiscal year 2025 from 32% in fiscal year 2024 from 31% in fiscal year 2023.2024. The $2.1$0.1 million product GM decrease in fiscal year 20242025 as compared to the prior year resulted from a decrease in the U.S. division. Product GM as a percentage of revenue decreased 2% for fiscal year 20242025 compared to the prior year due to producthigher mix.volume of sales to certain customers with lower margins. The $0.6$1.6 million increase in our TS segment service GM in fiscal year 20242025 as compared to the prior year resulted from an increase in GM in the U.S. division. Service GM as a percentage of revenue remained flat at 59% in fiscal year 20242025 due to increaseda thirdproportional party maintenance revenue, which is recorded as net sales meaning all the gross margin is recordedincrease in the services revenue financial statement line item causing increased GM as a percentagecost of revenue,sales offsetcompared by decreased GM from internal services which have associated fixed costs which decreased the GM as a percentage ofto revenue.
The overall HPP segment GM as a percentage of revenue increaseddecreased to 46% in fiscal year 2025 from 65% in fiscal year 2024 from 62% in fiscal year 2023.2024. The GM as a percentage of sales from products increaseddecreased 9%26% primarily due to thea nonrecurring prior year large ARIA AZT software license sale which was nearly all GM. The GM as a percentage of sales from services decreased 5%9% primarily due to decreased Multicomputer royalty revenues, which is nearly all GM and recorded as service revenue.
EngineeringResearch and Development Expenses
Our engineeringresearch and development expenses are only in our HPP segment. These expenses decreasedincreased $0.1$0.3 million tofrom $3.0 million forin fiscal year 2024 fromto $3.1$3.3 million forin fiscal year 2023.2025. This was primarily due to decreasedincreased labor expensesconsulting of $0.2$0.1 million in fiscal year 2024 when compared to fiscal year 2023, partially offset bymillion, increased stock compensation of $0.1 million, and increased salaries of $0.1 million. Fiscal year 20242025 and 20232024 expenses were primarily for product engineering expenses incurred in connection with the further development of the ARIA Zero Trust (AZT), ARIA SDS, and ARIA SDSADR cyber security products.
The TS segment SG&A expenses increased approximately $0.1 million for the fiscal year ended September 30, 2024 when compared to the prior year. This increase was primarily due to an increase in audit and tax fees of $0.3 million, an increase in stock compensation expense of $0.2 million, an increase in actuarial fees of $0.2 million in connection to preparing to sell the pension in the TS-UK division, partially offset with decreased variable compensation of $0.3 million and decreased bonus of $0.3 million.
The HPPTS segment SG&A expenseexpenses increaseincreased ofapproximately $0.8$0.6 million for the fiscal year ended September 30, 20242025 when compared to the prior yearyear. This increase was primarily attributedin the TS-US division due to increasedan consultingincrease of $0.4 million,million increasedin professionalvariable servicescompensation, ofan $0.2 million, increased selling including travel and events of $0.2 million, increased stock compensationincrease of $0.1 million,million increasedin recruitingsalaries, and an increase of $0.1 million,million partiallyin offsetrecruiting byfees. decreasedThe bonusesHPP segment SG&A expense remained flat at $4.6 million for fiscal year 2025 and 2024 without any significant changes in types of $0.2 million.expenses.
For the year ended September 30, 20242025, thethere was an increase in foreign exchange lossgain decreasedof $0.1$0.5 million primarily due to the TS U.K. division carrying a higher U.S. dollar weakeningbank lessaccount balance earlier in fiscal year 2025 when the dollar was on average stronger than the British pound, which caused a foreign exchange gain. In the prior fiscal year the U.S. dollar significantly weakened against the British pound causing an exchange loss. Additionally, the euro strengthened relative to the British pound in fiscal year 20242025 compared to fiscal year 2024 in which the prioreuro year.weakened relative to the British pound. The U.K. division has bank accounts with U.S. dollars and Euros.euros. There are also transactions in both of these currencies in the TS U.K. division. In consolidation, U.S. dollars and Euroseuros are remeasured into the functional currency, British Pounds,pounds, of our U.K. subsidiary. This non-cash remeasurement is included in foreign exchange gain or loss on the income statement and the foreign exchange gain or loss is primarily from athe U.S. Dollardollar and Euroeuro bank account. The U.S. Dollar bank account consists of approximately 87% of the currency held in the U.K. subsidiary after remeasurement into U.S. dollars.accounts.
Interest expense decreasedincreased $27$0.1 thousandmillion for the year ended September 30, 20242025 compared to the prior year period primarily due to lessincreased interest expense related to multi-year agreements with vendors in the TS U.S. division. Payments on these agreements contain both principal and interest expense. As principal payments are made the interest expense decreases. See Note 9 Accounts payable and accrued expenses, and Other noncurrent liabilities in Item 115 to this Annual Report on Form 10-K.
Interest income increaseddecreased $0.6$0.2 million for the year ended September 30, 20242025 when compared to the prior year. InterestThis is due to lower interest income of $0.1 million from cashCash and cash equivalents in fiscal year 20242025 increasedcompared $0.7to million fromthe prior year due to a significantly higherlower average balance and lower average interest rate during fiscal yearyear. 2024Additionally, earningthere interestwas income,$0.1 partially offset bymillion decreased interest income from multi-year agreementsagreements. The prime rate has decreased since the end of $0.1fiscal million.year 2023 resulting in customers getting better lower interest rates meaning less interest income. These agreements have payment terms in excess of one year (see Note 3 Financing Receivables, net in Item 115 to this Annual Report on Form 10-K for details) and are only in the TS-US segment.division.
The Employee Retention Tax Credit, net of costs to collect of $2.1 million was recognized in the fourth quarter of fiscal year 2023. The Coronavirus Aid, Relief, and Economic Security Act provided an Employee Retention Credit (“ERC”) which is a refundable tax credit against certain employment taxes. The Consolidated Appropriations Act, 2021 extended and expanded the availability of the employee retention credit through December 31, 2021 including amending the employee retention credit to be equal to 70% of qualified wages paid to employees during the 2021 calendar year. Both the TS-US division and HPP segment qualified for the ERC beginning in March 2021 for qualified wages through September 2021. There are no other amounts that will be received related to this credit.
The Company recorded an income tax benefit of $(931.6) thousand,million, which reflectedresulted in an effective tax rate of 22.2%,94.5%, for the year ended September 30, 2024.2025. The provisionbenefit iswas primarily driven by the benefitU.S. recognizedpre-tax as a result ofloss, windfalls for restricted stock awards that vested during the period, offset byand the change in valuation allowance. The benefit recorded during the fiscal year was $189 thousand for the windfall on restricted stock awards vesting during the period and an expense of $180 thousand for the change in valuation allowances against deferred tax assets.
For the year ended September 30, 2024, the income tax benefit was approximately $(93) thousand, which resulted in an effective tax rate of a 22.2%. The benefit was primarily driven by windfalls for restricted stock awards that vested during the period, partially offset by the change in valuation allowance.
For the year ended September 30, 2023, the income tax benefit was approximately $(469) thousand, which reflected an effective tax rate of a (9.9)% benefit. The provision was primarily driven by the benefit recognized as a result of the release of the valuation allowance against the majority of the Company's deferred tax assets. The benefit recorded during the fiscal year was $1.8 million for valuation allowances released on deferred tax assets related to prior years. The Company also claimed and received the Employee Retention Credit, which resulted in a net benefit of approximately $134 thousand, after amending prior year returns.
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. The Company has determined that it is more likely than not that substantially all of its net deferred tax assets in the U.S.U.S., jurisdictionexcept for certain state tax credits, will be utilizedrealized andfor thatthe associatedfiscal valuation allowances should be reversed during yearyears ended September 30, 2024.2024 and 2025. The Company separately analyzed the realizability of its federal and state credits and determined $796$495 thousand (net of federal benefit) of state credits are expected to expire unutilized and keptmaintained a valuation allowance against these credits. The Company will continuecontinued to maintain a valuation allowance against certain state tax credits in the U.S. and a full valuation allowance against the net U.K. deferred tax assets in the U.K. jurisdiction.assets.
Cash and cash equivalents increaseddecreased by $5.4$3.2 million to $27.4 million as of September 30, 2025 from $30.6 million as of September 30, 2024 from $25.2 million as of September 30, 2023.2024.
The following is a summary of our cash flows for the fiscal yearyears ended September 30, 20242025 and 20232024:
Cash provided by operating activities was $4.2$2.3 million for the year ended September 30, 20242025 compared to $3.9$4.2 million for the prior year.year period. The increasedecrease from prior year is primarily related theto changea decrease in Accounts receivable of $2.5 million and an increase of $7.5 in Accounts payable and accrued expenseexpenses, paymentspartially ofoffset $13.0 million as a large payment run at the end of fiscal year 2023 when in fiscal year 2024 there was not andwith a decrease in pensionfinancing and retirement plan liabilitiesreceivables of $0.4$7.7 million. The primaryremaining decreasesdifferences includeare arelated decreaseto oftiming net income (loss) change of $5.5 million, a decrease of $4.9 milliondifferences in otheroperating assets,assets and a decrease of $2.7 million in accounts receivable.liabilities.
The remaining differences are related to timing differences in operating assets and liabilities.
Cash used in investing activities was $258$(428) thousand for the year ended September 30, 20242025 compared to $341$(256) thousand used in investing activities for the prior year. The decreaseincrease from the prior year is primarily related to less additions of intangible assets and lessincreased purchases of property, equipment, and improvements during fiscal year 20242025 when compared to the prior fiscal year.
Cash providedused byin financing activities was $1.4$(5.0) million for the year ended September 30, 20242025 compared to $2.4$1.4 million usedprovided inby financing activities for the prior year.year period. The primary difference was the timing in the net borrowing on the line-of-credit, which for the year ended September 30, 20242025 we had a net repayment of $3.3 million compared to a net borrowing of $2.7 million compared to a net payment of $1.6 million in the prior year.year period. Additionally, in fiscal year 20242025 there werewas increased repurchases of common stock of $0.9 million and increased cash dividends paid by $0.4 million and increased treasury stock repurchases of $0.1$0.2 million compared to the prior fiscal year.
Our cash held by our foreign subsidiary in the United Kingdom totaled the equivalent of approximately $5.4$4.9 million as of September 30, 2024,2025, which consisted of 0.40.6 million Euros,euros, 0.30.4 million British Pounds,pounds, and 4.73.6 million U.S. Dollars.dollars. This cash is included in our total cash and cash equivalents reported within our financial statements. Due to the pension obligation in the U.K., we maintain a large balance of cash in the U.K. SubsequentIn October 2024, in connection with the planned termination of our defined benefit pension plan in the U.K., we paid 8.5 million British pounds to Septemberenter 30,into 2024,a buy-in contract. This payment is subject to adjustment as a result of subsequent data cleansing activities. Under the U.K.terms pensionof assets,this excludingbuy-in cash,contract, werethe allinsurer convertedis into cashliable to sellpay the U.K. pension obligation. Asbenefits of the dateplan, ofbut thisthe filing,Company therestill isretains anfull agreementlegal responsibility to sellpay the pensionbenefits obligationto inmembers full.using the insurance payments. This agreement has many contingencies and the expected timeframe of the salebuy-in occurringcontract turning into a buy-out contract is 4within tofiscal 16year months from the date of this filing.2026.
As of September 30, 20242025 and September 30, 2023,2024, the Company maintained a line of credit with a capacity of up to $15.0 million for inventory accessible to both the HPP and TS segments. This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million. Amounts of $10.2$14.1 million and $13.5$10.8 million were available as of September 30, 20242025 and September 30, 2023,2024, respectively. As of September 30, 20242025 and September 30, 20232024 there were no cash withdrawals outstanding. For a further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 12 Line of Credit.
The last note payable was paid in full in fiscal year 20242025 of $0.4 million and no notes remain outstanding as of September 30, 2024.2025. There is a total of $3.8$5.3 million due to vendors with financing agreements outstanding as of September 30, 2024,2025, including $2.3$3.5 million payments to be made thatin arethe current.next 12 months from September 30, 2025. Each vendor financing agreement was related to a sale and has a related financing receivable. There is a total of $7.3$16.3 million due to the Company of customer financing agreements outstanding as of September 30, 2024,2025, including $4.3$9.9 million to be received thatin the next 12 months from September 30, 2025 If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means. If we are current.unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition, retain key employees, or continue to effectively operate our business.
A subsequent review of qualified wages for the Employee Retention Credit was performed during the preparation of the tax provision for fiscal year 2023 and it was determined $0.6 million of the money received did not qualify and was paid back to the Internal Revenue Service (IRS) except for $11k, which is still owed to the IRS as of September 30, 2024. This $0.6 million was included in Cash and cash equivalents as of September 30, 2023. However, this amount was not recognized in net income in the Consolidated statements of operations for the fiscal year ended September 30, 2023. The Company may be subject to interest and penalties related to this cash.
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition, retain key employees, or continue to effectively operate our business.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to the inventory valuation, income taxes, deferred compensation, revenue recognition, and retirement plans, and contingencies.plans. We base our estimates on historical performance and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition, valuation allowances, specifically the net deferred tax asset valuation allowance, inventory valuation, and pension and retirement plans.
Inventories
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
What changed in the latest 10-Q
Risk Factors
There have been no material changes to the risk factors set forth in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2025.
No wording changes found in this section.
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Management's Discussion & Analysis (MD&A)
Largest changes
Thesee in full comparisonincreasedecrease in TS segment product sales of$2.8$0.3 million is primarily due to decreased sales to one existing customer of $1.9 million offset with increased sales to several existing major customers in the US division of$3.2 million, partially offset with decreased sales to two existing customers in the UK division of $0.4$1.6 million. Service sales for the three months endedMarchJune31,30, 2026increaseddecreased$0.4$0.7 million from the same prior year period, which was attributable to the US division. Theincreasedecrease consisted ofanaincreasedecrease in third-party maintenance sales of$0.3$0.4 million and a $0.5 million decrease from internal and third-party services offset by an increase in managed services of $0.2million, partially offset by a $0.1milliondecreaseHPPfromsegmentinternalsales change was as follows for the three months ended June 30, 2026 andthird-party services.2025:
Our sales decreased by approximatelysee in full comparison$0.8$1.8 million, or3%,4%, to$28.0$42.4 million for thesixnine months endedMarchJune31,30, 2026 as compared to$28.8$44.3 million for thesixnine months endedMarchJune31,30, 2025. The decrease in sales is the result of a decrease of$0.9$2.0 million in the TS segment, partially offset by an increase of$0.1$0.2 million in our HPP segment. Our gross margin percentage increased3%2% to33%32% of sales for thesixnine months endedMarchJune31,30, 2026 compared to 30% for thesixnine months endedMarchJune31,30, 2025. For thesixnine months endedMarchJune31,30, 2026 operating loss was$1.0$2.5 million compared to operating loss of$1.3$2.6 million for the same prior year period. Other income, net increased$0.1$0.2 million for thesixnine months endedMarchJune31,30, 2026 compared to same prior year period. An income tax benefit of$0.3$0.7 million was recorded for thesixnine months endedMarchJune31,30, 2026 compared to an income tax benefit of$0.8$1.5 million in the same prior year period.
Our salessee in full comparisonincreaseddecreased by$2.9$1.0 million, or22%,6%, to$16.0$14.4 million for the three months endedMarchJune31,30, 2026 compared to$13.1$15.4 million for the three months endedMarchJune31,30, 2025. Our gross margin percentagedecreasedincreased to28%30% for the three months endedMarchJune31,30, 2026 compared to32%29% for the same prior year period. For the three months endedMarchJune31,30, 2026therewewashad an operating loss of$0.9$1.5 million compared to an operating loss of$1.0$1.2 million for the three months endedMarchJune31,30, 2025. Other income, net increased$0.3$0.1 million to$0.5$0.3 million for the three months endedMarchJune31,30, 2026 compared to $0.2 million for the same prior year period. An income tax benefit of$0.6$0.4 million was recorded for the three months endedMarchJune31,30, 2026 compared to an income tax benefit of$0.7$0.8 million in the same period in the prior year.
Thesee in full comparison$3.6$0.9 millionincreasedecrease in sales to the Americas was primarily the result ofanaincreasedecrease in the TS-US division of$3.8$1.1 million, partially offset byaandecreaseincrease of$0.2$0.1 million in the HPP segment. The$0.6$0.1 million decrease in sales to Europe was primarily the result of decreased sales by our TS-UKdivision of 0.4 million combined with a decrease in our TS-US division of $0.2 million.division. The sales to APAC and Africa decreased$0.1$4millionthousand for the three months endedMarchJune31,30, 2026 compared to the same prior year period due to the HPP segment.
The $0.1 millionsee in full comparisondecreasedincreased foreign exchange gain for thesixnine months endedMarchJune31,30, 2026 was due totheprimarilyUSremeasurementDollarofstrengtheningU.S.lessdollar-denominatedrelativebalancestoheld by theBritishCompany’sPoundU.K.comparedsubsidiarytoduring thesame prior yearcurrent period. In consolidation,USU.S. dollars are remeasured into the functional currency, British Pounds, of ourUKU.K. subsidiary. This non-cash remeasurement is included in the Foreign exchange gain in the Consolidated Statements of Operations. The foreign exchange gain in the current period was primarily from theUSU.S. Dollar balance in our TSUKU.K. division.
The decrease in TS segment product sales ofsee in full comparison$1.7$2.0 million during the period as compared to the prior year period is primarily attributable to decreased sales of$1.2$1.6 million in the US division to existing major customers combined with a decrease in sales of$0.5$0.4 million in the UK division to three existing major customers. Service sales for thesixnine months endedMarchJune31,30, 2026increasedwere$0.8relativelymillionflat from the prior year period. In the U.S. division there was a$0.9$0.3 millionincrease due to anincrease in third-party maintenance salesof $0.8 millionand an increase in managed services of$0.4$0.7 million, partially offset by a decrease from internal and third-party services of$0.3$0.7 million. There was a $0.1 million decrease in the UK service sales due to a decrease in maintenance sales.
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Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses for accounts receivable and financing receivables, inventory valuation, impairment assessment of intangibles, income taxes, deferred compensation and retirement plans, as well as estimated selling prices used for revenue recognition and contingencies. We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2025 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management believes there have been no significant changes for the sixnine months ended MarchJune 31,30, 2026 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2025.
Overview of the three months ended MarchJune 31,30, 2026
Our sales increaseddecreased by $2.9$1.0 million, or 22%,6%, to $16.0$14.4 million for the three months ended MarchJune 31,30, 2026 compared to $13.1$15.4 million for the three months ended MarchJune 31,30, 2025. Our gross margin percentage decreasedincreased to 28%30% for the three months ended MarchJune 31,30, 2026 compared to 32%29% for the same prior year period. For the three months ended MarchJune 31,30, 2026 therewe washad an operating loss of $0.9$1.5 million compared to an operating loss of $1.0$1.2 million for the three months ended MarchJune 31,30, 2025. Other income, net increased $0.3$0.1 million to $0.5$0.3 million for the three months ended MarchJune 31,30, 2026 compared to $0.2 million for the same prior year period. An income tax benefit of $0.6$0.4 million was recorded for the three months ended MarchJune 31,30, 2026 compared to an income tax benefit of $0.7$0.8 million in the same period in the prior year.
The following table details our results of operations in dollars and as a percentage of sales for the three months ended MarchJune 31,30, 2026 and 2025:
TS segment sales change was as follows for the three months ended MarchJune 31,30, 2026 and 2025:
The increasedecrease in TS segment product sales of $2.8$0.3 million is primarily due to decreased sales to one existing customer of $1.9 million offset with increased sales to several existing major customers in the US division of $3.2 million, partially offset with decreased sales to two existing customers in the UK division of $0.4$1.6 million. Service sales for the three months ended MarchJune 31,30, 2026 increaseddecreased $0.4$0.7 million from the same prior year period, which was attributable to the US division. The increasedecrease consisted of ana increasedecrease in third-party maintenance sales of $0.3$0.4 million and a $0.5 million decrease from internal and third-party services offset by an increase in managed services of $0.2 million, partially offset by a $0.1 million decreaseHPP fromsegment internalsales change was as follows for the three months ended June 30, 2026 and third-party services.2025:
HPP segment sales change was as follows for the three months ended March 31, 2026 and 2025:
The HPP product sales decreasedincreased $0.2$0.1 million for the three months ended MarchJune 31,30, 2026 compared to the same prior year period primarily due to decreasedincreased ARIA AZT revenue. The HPP service sales decreased $0.1 million due to one nonrecurring customer support sale.
Our sales by geographic area, which are based on the customer location to which the products were shipped or services rendered, were as follows for the three months ended MarchJune 31,30, 2026 and 2025:
The $3.6$0.9 million increasedecrease in sales to the Americas was primarily the result of ana increasedecrease in the TS-US division of $3.8$1.1 million, partially offset by aan decreaseincrease of $0.2$0.1 million in the HPP segment. The $0.6$0.1 million decrease in sales to Europe was primarily the result of decreased sales by our TS-UK division of 0.4 million combined with a decrease in our TS-US division of $0.2 million.division. The sales to APAC and Africa decreased $0.1$4 millionthousand for the three months ended MarchJune 31,30, 2026 compared to the same prior year period due to the HPP segment.
Our gross margin ("“GM"”) increaseddecreased $0.3$0.1 million for the three months ended MarchJune 31,30, 2026 as compared to the same prior year period. The GM as a percentage of sales decreasedincreased to 28%30% for the three months ended MarchJune 31,30, 2026 compared to the same prior year period of 32%.29%.
The impact of product mix within our TS segment on gross margin for the three months ended MarchJune 31,30, 2026 and 2025 was as follows:
The overall TS segment GM as a percentage of sales decreasedwas to 27%29% for the three month period ended MarchJune 31,30, 2026 compared to 31%29% for the same prior year period. Product GM as a percentage of revenue decreasedincreased 3%4% due to a higher volume of sales with lowerhigher margins compared to the same prior year period. The service GM as a percentage of revenue increaseddecreased 2%3% from the prior year primarily due to increaseddecreased third-party maintenance sales, which are recorded “net” which means that the revenue, net of the associated cost, is recorded in the Services revenue financial statement line item causing an increase in GM as a percentage of sales.
The impact of product mix within our HPP segment on gross margin for the three months ended MarchJune 31,30, 2026 and 2025 was as follows:
The overall HPP segment GM as a percentage of sales decreasedincreased to 50%51% for the three months ended MarchJune 31,30, 2026 from 57%the 32% for the three months ended MarchJune 31,30, 2025. The 28% increase in product GM as a percentage of product revenue for the three months ended MarchJune 31,30, 2026 compared to the same prior year period was primarily attributed to the current period’s product mix primarily consisting of software sales, which were nearly all GM. The service GM as a percentage of services revenue from the same prior year period decreased 13%3% to 40%39% for the three months ended MarchJune 31,30, 2026 compared to 53%42% for the three months ended MarchJune 31,30, 2025 due to one high GM customer support contract which did not recur in the current period.
The research and development expenses incurred by our HPP segment remained relatively flat at $0.8 million for three months ended MarchJune 31,30, 2026 compared to the same prior year period without any significant change in specific types of expenses. The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA Zero Trust Gateway cyber security products.
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended MarchJune 31,30, 2026 and 2025:
SG&A expenses increased $0.1$0.2 million to $4.5$5.0 million for the three months ended MarchJune 31,30, 2026 compared to the same prior year period of $4.4$4.9 million. The $0.2$0.3 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of increased variable compensation. The HPP segment SG&A expenses decreased $0.1 million for the three months ended MarchJune 31,30, 2026 as compared to the prior year period primarily due to decreased consulting expenses.
The following table details other income, net for the three months ended MarchJune 31,30, 2026 and 2025:
Total other income (expense), net for the three months ended MarchJune 31,30, 2026 increased $0.3$0.1 million to $0.5$0.3 million compared to $0.2 million for the same prior year period.
The $0.2 million increaseddecreased foreign exchange gain (loss) for the three months ended MarchJune 31,30, 2026 was primarily due to the US Dollar strengthening in the current period compared to the same prior year period in which it weakenedstrengthened relative to the British Pound. In consolidation, US dollars are remeasured into the functional currency, British Pounds, of our UK subsidiary. This non-cash remeasurement is included in the Foreign exchange gain (loss) in the Consolidated Statements of Operations. The foreign exchange gain (loss) was primarily from the US Dollar balance in our TS UK division.
Interest income increased $113$84 thousand for the three months ended MarchJune 31,30, 2026 compared to the same prior year period primarily due to increased interest income from agreements that have payment terms in excess of one year (see Note 5 Financing receivables, net in Item 1 to this Quarterly Report on Form 10-Q for details), partially offset by a reduction in interest rates related to our Cash and cash equivalents combined with a decreased average balance. All of these agreements are in the TS-US division.
The interest expense increase of $90$77 thousand for the three months ended MarchJune 31,30, 2026 compared to the same prior year period was related to the TS US division entering into additional multi-year vendor contracts related to sales agreements that have payment terms in excess of one year. Not all sales agreements that have payments in excess of one year have related multi-year vendor contracts.
The Company recorded an income tax benefit of $568$366 thousand and $683$751 thousand for the three months ended MarchJune 31,30, 2026 and 2025, respectively. For these periods, the difference between our effective income tax rate and the U.S. federal statutory rate was the impact of tax credits that we expect to be able to utilize against federal and state taxes, the change in valuation allowance maintained against certain state tax credits, and the excess tax benefits on restricted stock awards that vested during the period.
Overview of the sixnine months ended MarchJune 31,30, 2026
Our sales decreased by approximately $0.8$1.8 million, or 3%,4%, to $28.0$42.4 million for the sixnine months ended MarchJune 31,30, 2026 as compared to $28.8$44.3 million for the sixnine months ended MarchJune 31,30, 2025. The decrease in sales is the result of a decrease of $0.9$2.0 million in the TS segment, partially offset by an increase of $0.1$0.2 million in our HPP segment. Our gross margin percentage increased 3%2% to 33%32% of sales for the sixnine months ended MarchJune 31,30, 2026 compared to 30% for the sixnine months ended MarchJune 31,30, 2025. For the sixnine months ended MarchJune 31,30, 2026 operating loss was $1.0$2.5 million compared to operating loss of $1.3$2.6 million for the same prior year period. Other income, net increased $0.1$0.2 million for the sixnine months ended MarchJune 31,30, 2026 compared to same prior year period. An income tax benefit of $0.3$0.7 million was recorded for the sixnine months ended MarchJune 31,30, 2026 compared to an income tax benefit of $0.8$1.5 million in the same prior year period.
The following table details our results of operations in dollars and as a percentage of sales for the sixnine months ended MarchJune 31,30, 2026 and 2025:
TS segment sales change was as follows for the sixnine months ended MarchJune 31,30, 2026 and 2025:
The decrease in TS segment product sales of $1.7$2.0 million during the period as compared to the prior year period is primarily attributable to decreased sales of $1.2$1.6 million in the US division to existing major customers combined with a decrease in sales of $0.5$0.4 million in the UK division to three existing major customers. Service sales for the sixnine months ended MarchJune 31,30, 2026 increasedwere $0.8relatively millionflat from the prior year period. In the U.S. division there was a $0.9$0.3 million increase due to an increase in third-party maintenance sales of $0.8 million and an increase in managed services of $0.4$0.7 million, partially offset by a decrease from internal and third-party services of $0.3$0.7 million. There was a $0.1 million decrease in the UK service sales due to a decrease in maintenance sales.
HPP segment sales change was as follows for the sixnine months ended MarchJune 31,30, 2026 and 2025:
HPP product sales decreasedincreased by $0.1 million for the sixnine months ended MarchJune 31,30, 2026 as compared to the prior year period primarily as a result of onelegacy ARIA AZT order which occurred in the prior year period and did not recur in the current year.sales. The HPP service sales increased $0.2$0.1 million for the sixnine months ended MarchJune 31,30, 2026 compared to the prior year period due to increased revenue from Multicomputer repair services of $0.3 million, partially offset with decreased customer support revenue of $0.1$0.2 million.
Our sales by geographic area, which are based on the customer location to which the products were shipped or services rendered, were as follows for the sixnine months ended MarchJune 31,30, 2026 and 2025:
The $0.4$1.3 million decrease in sales to the Americas was the result of a decrease in the HPP segment of $0.2 million, a decrease of $0.1$1.1 million in the TS-US division, and a decrease in the TS-UK division of $0.1 million, partially offset with a decrease in the HPP segment of $0.1 million. The sales to Europe decreased $0.7$0.8 million from the prior year due to a decrease of $0.5$0.6 million in the TS-UK division combined with a decrease in the TS-US division of $0.2 million. The sales to APAC and Africa increased $0.3 million due to the HPP segment.
Our gross margin ("“GM"”) increased $0.4$0.3 million for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period. The GM as a percentage of total sales increased to 33%32% for the sixnine months ended MarchJune 31,30, 2026 as compared to the same prior year period of 30%.
The impact of product mix within our TS segment on gross margin for the sixnine months ended MarchJune 31,30, 2026 and 2025 was as follows:
The overall TS segment GM as a percentage of total sales increased to 31% for the sixnine month period ended MarchJune 31,30, 2026 compared to 30%29% from the same prior year period. Product GM as a percentage of revenue for the sixnine months ended MarchJune 31,30, 2026 decreasedincreased 1% from the prior year period due to product mix. Service GM as a percentage of total sales increased to 60%57% for the sixnine months ended MarchJune 31,30, 2026 compared to 57%56% from the prior year period. This was primarily due to increased third-party maintenance sales, which are recorded “net” which means that the revenue, net of the associated cost, is recorded in the Services revenue financial statement line item causing an increase in GM as a percentage of sales.
The impact of product mix within our HPP segment on gross margin for the sixnine months ended MarchJune 31,30, 2026 and 2025 was as follows:
The overall HPP segment GM as a percentage of sales increased to 66%62% for the sixnine months ended MarchJune 31,30, 2026 from 54%49% for the sixnine months ended MarchJune 31,30, 2025. The 28%32% increase in product GM as a percentage of product revenue compared to the same prior year period was primarily attributed to the product mix primarily consisting of software sales, which were nearly all GM. The 9%6% increase in service GM as a percentage of service revenue for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period was due to increased Multicomputer repair services, which are relatively high margin compared to other services.
The research and development expenses incurred by our HPP segment increased to $1.7$2.5 million for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period of $1.5$2.3 million due to increased salaries. The current period expenses were primarily for product engineering expenses incurred in connection with the continued development of the ARIA Zero Trust Gateway cyber security products.
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the sixnine months ended MarchJune 31,30, 2026 and 2025:
SG&A expenses decreasedincreased $0.1 million for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period. The $0.1$0.4 million increase in TS segment SG&A expenses compared to the same prior year period is primarily the result of increased salaries and variable compensation. The HPP segment SG&A expenses decreased $0.2$0.3 million for the sixnine months ended MarchJune 31,30, 2026 as compared to the same prior year period primarily due to decreaseda stockreduction compensation expense andin consulting expenses.
The following table details other income, net for the sixnine months ended MarchJune 31,30, 2026 and 2025:
Total other income, net for the sixnine months ended MarchJune 31,30, 2026 increased $0.1$0.3 million to income of $1.0$1.4 million compared to income of $0.9$1.1 million in the same prior year period.
The $0.1 million decreasedincreased foreign exchange gain for the sixnine months ended MarchJune 31,30, 2026 was due to theprimarily USremeasurement Dollarof strengtheningU.S. lessdollar-denominated relativebalances toheld by the BritishCompany’s PoundU.K. comparedsubsidiary toduring the same prior yearcurrent period. In consolidation, USU.S. dollars are remeasured into the functional currency, British Pounds, of our UKU.K. subsidiary. This non-cash remeasurement is included in the Foreign exchange gain in the Consolidated Statements of Operations. The foreign exchange gain in the current period was primarily from the USU.S. Dollar balance in our TS UKU.K. division.
Interest income increased $225$309 thousand for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period primarily due to increased interest income from agreements that have payment terms in excess of one year (see Note 5 Financing receivables, net in Item 1 to this Quarterly Report on Form 10-Q for details), partially offset with decreased interest rates related to our Cash and cash equivalents and a decreased average balance. All of these agreements are in the TS-US division.
The interest expense increase of $141$218 thousand for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period was primarily related to the TS US division entering into additional multi-year vendor contracts related to sales agreements in fiscal year 2026 and 2025 that have payment terms in excess of one year. Not all sales agreements that have payments in excess of one year have related multi-year vendor contracts.
The Company recorded an income tax benefit of $288$654 thousand and $798$1.5 thousandmillion for the sixnine months ended MarchJune 31,30, 2026 and 2025, respectively. For these periods, the difference between our effective income tax rate and the U.S. federal statutory rate was the impact of tax credits that we expect to be able to utilize against federal and state taxes, the change in valuation allowance maintained against certain state tax credits, and the excess tax benefits on restricted stock awards that vested during the period.
Cash and cash equivalents decreased by $4.3$2.8 million to $23.1$24.7 million as of MarchJune 31,30, 2026 from $27.4 million as of September 30, 2025.
The following is a summary of our cash flows for the sixnine months ended MarchJune 31,30, 2026 and 2025:
Cash used in operating activities was $3.4$3.0 million for the sixnine months ended MarchJune 31,30, 2026 compared to $3.7$0.4 million provided by operating activities in the prior year. Our largest source of cash provided by our operations is receipts from our customers. Net cash provided by operating activities can be impacted by factors such as timing of when we invoice the customer and receive payment, when we receive vendor invoices and make payments as well as vendor payment terms, and inventory fluctuations are dependent on when orders are received and shipped.
The operating cash used during the period primarily reflects the payment of Accounts payable and accrued expenses outstanding as of September 30, 2025 and continued investment in ARIA Zero Trust Gateway cyber security products. Collections remained strong during the period.
Cash used in investing activities increasedwas $0.1relatively millionflat for the sixnine months ended MarchJune 31,30, 2026 compared to the same prior year period due to increased purchases of property, equipment, and improvements.period.
Cash usedprovided in financing activities was $0.7$0.4 million for the sixnine months ended MarchJune 31,30, 2026 compared to $4.6$4.5 million used in the same prior year period. The decreaseincrease from the prior year was primarily due to decreased net repayments on our line-of-credit of approximately $3.7$4.5 million from the prior year and repurchases of common stock of $0.2$0.4 million. The line-of-credit payment changes are due to the timing of sales and related vendor invoices.
Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $5.0$5.1 million as of MarchJune 31,30, 2026 and consisted of 0.91.2 million Euros, 0.2 million British Pounds, and 3.83.7 million US Dollars. This cash is included in our total Cash and cash equivalents reported on the Condensed Consolidated Balance Sheets.
As of MarchJune 31,30, 2026 and September 30, 2025, the Company maintained a line of credit with a capacity of up to $15.0 million for inventory accessible to both the HPP and TS segments. This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million. AsAmounts of March$12.6 31,million and $14.1 million were available as of June 30, 2026 and September 30, 20252025, an amount of $14.1 million was available under the inventory line of credit.respectively. As of MarchJune 31,30, 2026 and September 30, 2025 there were no cash withdrawals outstanding. For further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 9 Line of Credit.
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. As of MarchJune 31,30, 2026 and September 30, 2025 there were $16.4$16.5 million and $14.9 million of Financing receivables, net outstanding, respectively. Of these amounts, $7.7$8.3 million and $8.9 million were current assets as of MarchJune 31,30, 2026 and September 30, 2025, respectively.
Related to the Financing Receivables, net there was a balance of $8.8$8.1 million and $4.8 million of multi-year contracts with financing due to our vendors. Of these amounts $4.6$4.5 million and $3.1$3.2 million were current liabilities as of MarchJune 31,30, 2026 and September 30, 2025, respectively. The current portion of these vendor financing arrangements is within Accounts payable and accrued expenses. The noncurrent portion is within Other noncurrent liabilities. Not every financing arrangement with our customers has a related vendor financing arrangement. Some vendors do not offer financing for agreements and if offered, management determines whether to use vendor financing due to various factors including interest rates and cash flow projections. Refer to Note 5 – Financing receivables, net and Note 8 Accounts payable and accrued expenses, and Other noncurrent liabilities for more information.
CSPI insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 6 Form 4 filings (4 insiders, 10 trade dates, 19,718 shares, about $174.7K) and open-market sales in 0 filings. Net open-market shares: 19,718 (purchases minus sales); net value about $174.7K.Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
| Trade date | Insider | Transaction | Shares | Price | Value |
|---|---|---|---|---|---|
| 2026-09-15 | Nerges Joseph R |
Open-market purchase | 472 | $7.96 | $3.8K |
| 2026-09-15 | Nerges Joseph R |
Open-market purchase | 28 | $7.90 | $221 |
| 2026-09-14 | Nerges Joseph R |
Open-market purchase | 500 | $7.90 | $4.0K |
| 2026-09-11 | Nerges Joseph R |
Open-market purchase | 1,600 | $7.75 | $12.4K |
| 2026-09-11 | Nerges Joseph R |
Open-market purchase | 1,000 | $7.90 | $7.9K |
| 2026-09-11 | Nerges Joseph R |
Open-market purchase | 1,000 | $7.85 | $7.8K |
| 2026-07-31 | Levine Gary W |
Grant/award | 259 | $7.52 | $1.9K |
| 2026-06-10 | Nerges Joseph R |
Open-market purchase | 71 | $8.30 | $589 |
| 2026-06-10 | Nerges Joseph R |
Open-market purchase | 100 | $8.32 | $832 |
| 2026-06-09 | Nerges Joseph R |
Open-market purchase | 199 | $8.05 | $1.6K |
| 2026-06-09 | Nerges Joseph R |
Open-market purchase | 700 | $8.69 | $6.1K |
| 2026-06-08 | Nerges Joseph R |
Open-market purchase | 800 | $8.40 | $6.7K |
| 2026-06-08 | Nerges Joseph R |
Open-market purchase | 500 | $8.60 | $4.3K |
| 2026-06-08 | Nerges Joseph R |
Open-market purchase | 1,000 | $8.75 | $8.8K |
| 2026-05-15 | Folger Anthony |
Open-market purchase | 2,500 | $9.36 | $23.4K |
| 2026-05-13 | Azeri Ismail |
Open-market purchase | 218 | $9.41 | $2.1K |
| 2026-05-13 | Nerges Joseph R |
Open-market purchase | 400 | $9.19 | $3.7K |
| 2026-05-13 | Nerges Joseph R |
Open-market purchase | 500 | $9.26 | $4.6K |
| 2026-05-12 | Azeri Ismail |
Open-market purchase | 2,282 | $9.38 | $21.4K |
| 2026-05-12 | Nerges Joseph R |
Open-market purchase | 200 | $9.15 | $1.8K |
| 2026-05-12 | Nerges Joseph R |
Open-market purchase | 800 | $9.30 | $7.4K |
| 2026-05-12 | Webber Stephen J. |
Open-market purchase | 2,500 | $9.48 | $23.7K |
| 2026-05-11 | Nerges Joseph R |
Open-market purchase | 500 | $9.20 | $4.6K |
| 2026-05-11 | Nerges Joseph R |
Open-market purchase | 348 | $9.18 | $3.2K |
| 2026-05-11 | Nerges Joseph R |
Open-market purchase | 1,500 | $9.22 | $13.8K |
| 2026-03-27 | Azeri Ismail |
Grant/award | 5,000 | — | — |
Well-known investors holding CSPI (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| Renaissance Technologies | 2026-06-30 | 267,714 | $2.1M | 0.0% | Reduced 4% |
| Millennium Management (Israel Englander) | 2026-06-30 | 69,612 | $552.7K | 0.0% | New position |
| Point72 Asset Management (Steve Cohen) | 2026-06-30 | 18,945 | $150.4K | 0.0% | New position |
| Citadel Advisors (Ken Griffin) | 2026-06-30 | 14,548 | $115.5K | 0.0% | Reduced 6% |