10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q 
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended
December 31, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .

Commission File Number 0-10843

 
CSP Inc.
(Exact name of Registrant as specified in its Charter)
 

Massachusetts
04-2441294
(State of incorporation)
(I.R.S. Employer Identification No.)

175 Cabot Street - Suite 210
Lowell, Massachusetts 01854
(978) 663-7598
(Address and telephone number of principal executive offices)
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of February 16, 2016, the registrant had 3,683,794 shares of common stock issued and outstanding.

1

INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value) 
 
December 31,
2015
 
September 30,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,531

 
$
11,181

Accounts receivable, net of allowances of $299 and $331
17,797

 
18,468

Unbilled accounts receivable
426

 
1,420

Inventories, net
6,182

 
5,749

Refundable income taxes
—

 
43

Deferred income taxes
1,337

 
1,337

Other current assets
1,938

 
1,884

Total current assets
38,211

 
40,082

Property, equipment and improvements, net
1,611

 
1,564

 
 
 
 
Other assets:
 

 
 

Intangibles, net
384

 
416

Deferred income taxes
1,643

 
1,687

Cash surrender value of life insurance
3,089

 
3,064

Other assets
179

 
183

Total other assets
5,295

 
5,350

Total assets
$
45,117

 
$
46,996

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
13,350

 
$
13,776

Deferred revenue
1,802

 
2,931

Pension and retirement plans
664

 
675

Income taxes payable
13

 
—

Total current liabilities
15,829

 
17,382

Pension and retirement plans
9,730

 
10,009

Other long term liabilities
16

 
15

Total liabilities
25,575

 
27,406

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,767 and 3,688 shares, respectively
38

 
37

Additional paid-in capital
12,329

 
12,249

Retained earnings
15,558

 
15,689

Accumulated other comprehensive loss
(8,383
)
 
(8,385
)
Total shareholders’ equity
19,542

 
19,590

Total liabilities and shareholders’ equity
$
45,117

 
$
46,996


See accompanying notes to unaudited consolidated financial statements.

3

CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)

 
For the three months ended
 
December 31,
2015
 
December 31,
2014
Sales:
 
 
 
Product
$
17,003

 
$
15,653

Services
6,673

 
4,777

Total sales
23,676

 
20,430

 
 
 
 
Cost of sales:
 
 
 
Product
14,236

 
13,133

Services
4,250

 
3,342

Total cost of sales
18,486

 
16,475

 
 
 
 
Gross profit
5,190

 
3,955

 
 
 
 
Operating expenses:
 
 
 
Engineering and development
799

 
853

Selling, general and administrative
4,048

 
4,023

Total operating expenses
4,847

 
4,876

 
 
 
 
Operating income (loss)
343

 
(921
)
 
 
 
 
Other income (expense):
 
 
 
Foreign exchange gain (loss)
39

 
(21
)
Other expense, net
(11
)
 
(12
)
Total other income (expense)
28

 
(33
)
Income (loss) before income taxes
371

 
(954
)
Income tax expense (benefit)
88

 
(517
)
Net income (loss)
$
283

 
$
(437
)
Net income (loss) attributable to common stockholders
$
274

 
$
(421
)
Net income (loss) per share – basic
$
0.08

 
$
(0.12
)
Weighted average shares outstanding – basic
3,569

 
3,490

Net income (loss) per share – diluted
$
0.07

 
$
(0.12
)
Weighted average shares outstanding – diluted
3,726

 
3,490

 
See accompanying notes to unaudited consolidated financial statements.

4

CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)

 
 
For the three months ended
 
 
December 31,
2015
 
December 31,
2014
 
 
 
 
 
Net income (loss)
 
$
283

 
$
(437
)
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation gain adjustments
 
2

 
112

Other comprehensive income
 
2

 
112

Total comprehensive income (loss)
 
$
285

 
$
(325
)

See accompanying notes to unaudited consolidated financial statements.


5

CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Months Ended December 31, 2015:
(Amounts in thousands, except per share data)
 
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
other
comprehensive
loss
 
Total
Shareholders’
Equity
Balance as of September 30, 2015
3,688

 
$
37

 
$
12,249

 
$
15,689

 
$
(8,385
)
 
$
19,590

Net Income
—

 
—

 
—

 
283

 
—

 
283

Other comprehensive income
—

 
—

 
—

 
—

 
2

 
2

Stock-based compensation
—

 
—

 
80

 
—

 
—

 
80

Restricted stock cancellation
(4
)
 
—

 
—

 
—

 
—

 
—

Restricted stock issuance
83

 
1

 
—

 
—

 
—

 
1

Cash dividends on common stock ($0.11 per share)
—

 
—

 
—

 
(414
)
 
—

 
(414
)
Balance as of December 31, 2015
3,767

 
$
38

 
$
12,329

 
$
15,558

 
$
(8,383
)
 
$
19,542

 
See accompanying notes to unaudited consolidated financial statements.

6

CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
For the three months ended
 
December 31,
2015
 
December 31,
2014
Cash flows used in operating activities:
 
 
 
Net income (loss)
$
283

 
$
(437
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Depreciation and amortization
129

 
139

Amortization of intangibles
32

 
33

Foreign exchange (gain) loss
(39
)
 
21

Non-cash changes in accounts receivable
(29
)
 
13

Non-cash changes in inventory
116

 
55

Stock-based compensation expense on stock options and restricted stock awards
80

 
102

Deferred income taxes
23

 
5

(Increase) decrease in cash surrender value of life insurance
(24
)
 
5

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
1,424

 
(4,182
)
Increase in inventories
(583
)
 
(871
)
(Increase) decrease in refundable income taxes
41

 
(524
)
Increase in other current assets
(81
)
 
(1,238
)
Increase in other assets
—

 
(78
)
Increase (decrease) in accounts payable and accrued expenses
(675
)
 
3,090

Decrease in deferred revenue
(1,078
)
 
(723
)
Decrease in pension and retirement plans liability
(53
)
 
(14
)
Increase in income taxes payable
19

 
—

Increase in other long term liabilities
2

 
2

Net cash used in operating activities
(413
)
 
(4,602
)
Cash flows used in investing activities:
 

 
 

Life insurance premiums paid
—

 
(31
)
Purchases of property, equipment and improvements
(189
)
 
(103
)
Net cash used in investing activities
(189
)
 
(134
)
Cash flows provided by (used in) financing activities:
 

 
 

Net cash provided by (used in) financing activities
—

 
—

Effects of exchange rate on cash
(48
)
 
(59
)
Net decrease in cash and cash equivalents
(650
)
 
(4,795
)
Cash and cash equivalents, beginning of period
11,181

 
16,448

Cash and cash equivalents, end of period
$
10,531

 
$
11,653

Supplementary cash flow information:
 

 
 

Cash paid for income taxes
$
23

 
$
33

Cash paid for interest
$
—

 
$
85

Non-cash accrual of dividend payable
$
414

 
$
402


 See accompanying notes to unaudited consolidated financial statements.

7

CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2015 AND 2014

 
Organization and Business
 
CSP Inc. was founded in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSP Inc. and its subsidiaries (collectively “we”, “us”, “our”,
“CSPI” or the “Company”) develop and market IT integration solutions and high-performance cluster computer systems. The Company operates in two segments, its High Performance Products (“HPP”) segment (formerly the “High Performance Products and Solutions” segment) and its Technology Solutions (“TS”) segment (formerly the "Information Technology Solutions" segment).
 
1.    Basis of Presentation
 
The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been omitted.

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited consolidated financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.
 
2.    Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, including estimates and assumptions related to reserves for bad debt, reserves for inventory obsolescence, the impairment assessment of intangible assets, the calculation of estimated selling price and post-delivery support obligations used for revenue recognition and the calculation of income tax liabilities. Actual results may differ from those estimates under different assumptions or conditions.
 
3.    Earnings Per Share of Common Stock
 
Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the assumed weighted average number of common shares outstanding.
 
We are required to present earnings per share, or EPS, utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.
 

8

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

 
For the three months ended
 
December 31, 2015
 
December 31, 2014
 
(Amounts in thousands except per share data)
Net income (loss)
$
283

 
$
(437
)
Less: net income attributable to nonvested common stock
9

 
(16
)
Net income (loss) attributable to common stockholders
$
274

 
$
(421
)
 
 
 
 
Weighted average total shares outstanding – basic
3,684

 
3,625

Less: weighted average non-vested shares outstanding
115

 
135

Weighted average number of common shares outstanding – basic
3,569

 
3,490

Potential common shares from non-vested stock awards and the assumed exercise of stock options
157

 
—

Weighted average common shares outstanding – diluted
3,726

 
3,490

 
 
 
 
Net income (loss) per share – basic
$
0.08

 
$
(0.12
)
Net income (loss) per share – diluted
$
0.07

 
$
(0.12
)
 
All anti-dilutive securities, including certain stock options, are excluded from the diluted income (loss) per share computation. For the three months ended December 31, 2015 and 2014, 35,000 and 43,000 shares subject to stock options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive as their exercise price exceeded fair value. Additionally, 135,000 shares subject to non-vested restricted stock awards were excluded from the diluted income per share calculation as there was a net loss for the three months ended December 31, 2014 and their inclusion would have been anti-dilutive.


4.    Inventories

Inventories consist of the following:
 
December 31, 2015
 
September 30, 2015
 
(Amounts in thousands)
Raw materials
$
1,956

 
$
1,788

Work-in-process
506

 
387

Finished goods
3,720

 
3,574

Total
$
6,182

 
$
5,749

 
Finished goods includes inventory of approximately $0.1 million as of December 31, 2015 and September 30, 2015 that has been shipped, but for which all revenue recognition criteria have not been met.
 
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.2 million and $4.1 million as of December 31, 2015 and September 30, 2015, respectively.
 


9

5.    Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss are as follows:
 
 
December 31, 2015
 
September 30, 2015
 
 
(Amounts in thousands)
Cumulative effect of foreign currency translation
 
$
(2,823
)
 
$
(2,825
)
Cumulative unrealized loss on pension liability
 
(5,560
)
 
(5,560
)
Accumulated other comprehensive loss
 
$
(8,383
)
 
$
(8,385
)


6.    Pension and Retirement Plans
 
The Company has defined benefit and defined contribution plans in the United Kingdom, Germany and the U.S. In the United Kingdom and Germany, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain current and former employees. The domestic supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. Domestically, the Company also provides for officer death benefits through post-retirement plans to certain officers.  All of the Company’s defined benefit plans are closed to newly hired employees and have been for the two years ended September 30, 2015 and 2014 and for the three months ended December 31, 2015.

The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.
 
The Company's pension plan in the United Kingdom is the only plan with plan assets. The plan assets consist of an investment in a commingled fund which in turn comprises a diversified mix of assets including corporate equity securities, government securities and corporate debt securities.
 
The components of net periodic benefit costs related to the U.S. and international plans are as follows:
 
 
For the Three Months Ended December 31,
 
2015
 
2014
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
9

 
$
—

 
$
9

 
$
15

 
$
—

 
$
15

Interest cost
151

 
11

 
162

 
164

 
13

 
177

Expected return on plan assets
(97
)
 
—

 
(97
)
 
(108
)
 
—

 
(108
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service gain
—

 
—

 
—

 
—

 
—

 
—

Amortization of net gain
45

 
(1
)
 
44

 
53

 
(1
)
 
52

Net periodic benefit cost
$
108

 
$
10

 
$
118

 
$
124

 
$
12

 
$
136

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$
—

 
$
7

 
$
7

 
$
—

 
$
9

 
$
9

Interest cost
—

 
11

 
11

 
—

 
11

 
11

Amortization of net gain
—

 
(21
)
 
(21
)
 
—

 
(13
)
 
(13
)
Net periodic cost (benefit)
$
—

 
$
(3
)
 
$
(3
)
 
$
—

 
$
7

 
$
7


10



The fair value of the assets held by the U.K. pension plan by asset category are as follows:
 
Fair Values as of
 
December 31, 2015
 
September 30, 2015
 
Fair Value Measurements Using Inputs Considered as
 
Fair Value Measurements Using Inputs Considered as
Asset Category
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Amounts in thousands)
Cash on deposit
$
263

 
$
263

 
$
—

 
$
—

 
$
324

 
$
324

 
$
—

 
$
—

Pooled Funds
8,890

 
—

 
8,890

 
—

 
8,977

 
—

 
8,977

 
—

Total Plan Assets
$
9,153

 
$
263

 
$
8,890

 
$
—

 
$
9,301

 
$
324

 
$
8,977

 
$
—

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 


7.    Segment Information
 
The following table presents certain operating segment information.
 
 
 
 
Technology Solutions Segment
 
 
For the three months ended December 31,
 
High Performance Products Segment
 
Germany
 
United
Kingdom
 
U.S.
 
Total
 
Consolidated
Total
 
 
(Amounts in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
1,950

 
$
1,902

 
$
1,993

 
$
11,158

 
$
15,053

 
$
17,003

Service
 
867

 
4,772

 
190

 
844

 
5,806

 
6,673

Total sales
 
2,817

 
6,674

 
2,183

 
12,002

 
20,859

 
23,676

Income (loss) from operations
 
(423
)
 
463

 
(47
)
 
350

 
766

 
343

Assets
 
16,099

 
12,977

 
2,810

 
13,231

 
29,018

 
45,117

Capital expenditures
 
148

 
67

 
2

 
(28
)
 
41

 
189

Depreciation and amortization
 
57

 
40

 
5

 
59

 
104

 
161

 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 

 
 

 
 

 
 

 
 

 
 

Sales:
 
 

 
 

 
 

 
 

 
 

 
 

Product
 
$
2,452

 
$
2,144

 
$
1,570

 
$
9,487

 
$
13,201

 
$
15,653

Service
 
230

 
3,528

 
283

 
736

 
4,547

 
4,777

Total sales
 
2,682

 
5,672

 
1,853

 
10,223

 
17,748

 
20,430

Income (loss) from operations
 
(857
)
 
79

 
68

 
(211
)
 
(64
)
 
(921
)
Assets
 
15,850

 
12,861

 
3,770

 
15,308

 
31,939

 
47,789

Capital expenditures
 
21

 
81

 
1

 
—

 
82

 
103

Depreciation and amortization
 
71

 
47

 
7

 
47

 
101

 
172


Income (loss) from operations consists of sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by either other income/expense or by income taxes expense/benefit. Non-operating charges/income consists principally of investment income and interest expense.  All intercompany transactions have been eliminated.
 
    

11

The following table lists customers from which the Company derived revenues in excess of 10% of total revenues for the three months ended December 31, 2015, and 2014.

 
 
For the three months ended December 31,
 
 
2015
 
2014
 
 
Customer Revenues
 
% of Total
Revenues
 
Customer Revenues
 
% of Total
Revenues
 
(dollars in millions)
Customer A
 
$
2.9

 
12
%
 
$
2.8

 
13
%
Customer B
 
$
3.8

 
16
%
 
$
2.9

 
14
%

In addition, accounts receivable from Customer B totaled approximately $5.1 million or 30% of total consolidated accounts receivable, and approximately $7.9 million or 39% of total consolidated accounts receivable as of December 31, 2015 and September 30, 2015, respectively. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with this customer as of December 31, 2015. No other customers accounted for 10% or more of total consolidated accounts receivable as of December 31, 2015 or September 30, 2015.


8.    Dividends

On December 23, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on January 11, 2016 to shareholders of record as of December 31, 2015, the record date.



9.    Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014 ‑09, Revenue from Contracts with Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  This ASU clarifies the principles for recognizing revenue by, among other things, removing inconsistencies in revenue requirements, improving comparability of revenue recognition practices across entities and industries and providing improved disclosure requirements. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017; however, early adoption at the original effective date is still permitted.  We are currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.
 
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which excludes investments measured at net asset value, as a practical expedient for fair value, from the fair value hierarchy. This ASU is effective for interim and annual reporting periods beginning after December 15, 2015, and requires retrospective application, with early adoption permitted. The implementation of this ASU is not expected to have a material impact to the disclosures in our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefits Plans (Topic 965), which requires fully benefit-responsive investment contracts to be measured at contract value. Those Topics also require an adjustment to reconcile contract value to fair value, when these measures differ,
on the face of the plan financial statements. Fair value is measured using the requirements in Topic 820, Fair Value Measurement. This ASU is effective for fiscal years beginning after December 15, 2015, and requires retrospective application, with early adoption permitted. The implementation of this ASU is not expected to have a material impact to the disclosures in our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost and net realizable value, except for inventory measured using last-in, first-out (LIFO) or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017 and requires prospective application, with early adoption permitted as of the beginning of an interim or annual reporting period.

12

The Company has not yet assessed the potential impact of implementing this ASU on the disclosures in our consolidated financial statements.
 
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes, which require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Topic apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Topic. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The implementation of this guidance is not expected to have a material impact to the disclosures in our consolidated financial statements.




13

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
The discussion below contains certain forward-looking statements related but not limited to, among others, statements concerning future revenues and future business plans. In addition, forward-looking statements include statements in which we use words such as “expect,” “believe,” “anticipate,” “intend,” “project”, “estimate” “should” “could,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “would” and similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, the forward-looking statements are subject to significant risks and uncertainties, and thus we cannot assure you that these expectations will prove to have been correct, and actual results may vary from those contained in such forward-looking statements. We discuss many of these risks and uncertainties in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2015. Factors that may cause such variances include, but are not limited to, our dependence on a small number of customers for a significant portion of our revenue, our high dependence on contracts with the U.S. federal government, our reliance in certain circumstances on single sources for supply of key product components, and intense competition in the market segments in which we operate. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this document. Except as required by law, we do not undertake any obligation to publicly update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this filing and in our Annual Report on Form 10-K for the year ended September 30, 2015.
 
Markets for our products and services are characterized by rapidly changing technology, new product introductions and short product life cycles. These changes can adversely affect our business and operating results. Our success will depend on our ability to enhance our existing products and services and to develop and introduce, on a timely and cost effective basis, new products that keep pace with technological developments and address increasing customer requirements. The inability to meet these demands could adversely affect our business and operating results.
 
Critical Accounting Policies
 
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 uncollectible receivables, inventory valuation, 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 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. A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 

Results of Operations

Overview of the three months ended December 31, 2015

     Our revenue increased by approximately $3.2 million, or 16%, to $23.7 million for the three months ended December 31, 2015 as compared to $20.4 million for the three months ended December 31, 2014. The increase in revenue is the result of increases of $3.1 million and $0.1 million in our TS and HPP segments, respectively. Our gross profit margin percentage increased overall from 19% of revenues for the three months ended December 31, 2014 to 22% for the three months ended December 31, 2015. The 3% increase in our gross margin percentage is primarily attributed to higher product margins in our TS segment due to higher margins on our U.S. division product revenues, and the recognition of $0.7 million of royalties related to the equivalent number of high speed processing boards used in one and a half aircraft during the three months ended December 31, 2015 as compared to $0.1 million of royalty revenues for the three months ended December 31, 2014. Operating income increased by $1.3 million to $0.3 million for the three month period ended December 31, 2015 as compared to the three month period ended December 31, 2014 as a result of a higher gross profit and slightly lower operating expenses.
    


14

The following table details our results of operations in dollars and as a percentage of sales for the three months ended:
 
 
 
December 31, 2015
 
%
of sales
 
December 31, 2014
 
%
of sales
 
 
(Dollar amounts in thousands)
Sales
 
$
23,676

 
100
%
 
$
20,430

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales
 
18,486

 
78
%
 
16,475

 
81
 %
Engineering and development
 
799

 
4
%
 
853

 
4
 %
Selling, general and administrative
 
4,048

 
17
%
 
4,023

 
20
 %
Total costs and expenses
 
23,333

 
99
%
 
21,351

 
105
 %
Operating income (loss)
 
343

 
1
%
 
(921
)
 
(5
)%
Other income (expense)
 
28

 
—
%
 
(33
)
 
—
 %
Income (loss) before income taxes
 
371

 
1
%
 
(954
)
 
(5
)%
Income tax expense (benefit)
 
88

 
—
%
 
(517
)
 
(2
)%
Net income (loss)
 
$
283

 
1
%
 
$
(437
)
 
(3
)%


Revenues

     Our revenues increased by approximately $3.2 million to $23.7 million for the three months ended December 31, 2015 as compared to $20.4 million of revenues for the three months ended December 31, 2014. The revenue increase was the result of increases of $3.1 million and $0.1 million in our TS and HPP segments, respectively. The TS segment revenue increased by $1.8 million, $1.0 million and $0.3 million in our divisions located in the U.S., Germany, and the U.K., respectively. The HPP segment revenue increased by $0.1 million in our only HPP division which is based in the U.S.

HPP segment revenue change by product line was as follows for the three months ended December 31, 2015 and 2014:
 
 
 
 
 
 
Increase (decrease)
 
 
2015
 
2014
 
$
 
%
 
 
(Amounts in thousands)
 
 
Products
 
$
1,950

 
$
2,452

 
$
(502
)
 
(20
)%
Services
 
867

 
230

 
637

 
277
 %
Total
 
$
2,817

 
$
2,682

 
$
135

 
5
 %

The increase in HPP service revenues is attributed to recognizing approximately $0.7 million of royalties related to the equivalent number of high-speed processing boards used in one and a half aircraft during the three months ended December 31, 2015 as compared to $0.1 million of royalty revenues for the three month period ended December 31, 2014. The decrease in product revenues is primarily attributed to lower Myricom product line sales for the three months ended December 31, 2015 as compared to the three months ended December 31, 2014.

TS segment revenue change by product line was as follows for the three months ended December 31, 2015 and 2014:
 
 
 
 
 
 
Increase
 
 
2015
 
2014
 
$
 
%
 
 
(Amounts in thousands)
 
 
Products
 
$
15,053

 
$
13,201

 
$
1,852

 
14
%
Services
 
5,806

 
4,547

 
1,259

 
28
%
Total
 
$
20,859

 
$
17,748

 
$
3,111

 
18
%

The $3.1 million increase in TS segment revenues during the three months ended December 31, 2015 as compared to the three months ended December 31, 2014, was the result of increases of $1.8 million, $1.0 million, and $0.3 million, in our

15

divisions located in the U.S., Germany and the U.K., respectively. The increase in product revenues was primarily related to our U.S. division and the increase in service revenues is related to our division in Germany.

      Our revenues by geographic area based on the customer location to which the products were shipped or services rendered was as follows for the three months ended December 31, 2015 and December 31, 2014:
 
 
 
 
Increase
 
 
2015
 
%
 
2014
 
%
 
$
 
%
 
 
(Dollar amounts in thousands)
Americas
 
$
14,294

 
60
%
 
$
12,618

 
62
%
 
$
1,676

 
13
%
Europe
 
8,996

 
38
%
 
7,432

 
36
%
 
1,564

 
21
%
Asia
 
386

 
2
%
 
380

 
2
%
 
6

 
2
%
Totals
 
$
23,676

 
100
%
 
$
20,430

 
100
%
 
$
3,246

 
16
%


Gross Margins

     Our gross margin ("GM") increased by $1.2 million, or 3% of revenues, to $5.2 million for the three months ended December 31, 2015 as compared to a gross margin of $4.0 million for the three months ended December 31, 2014 as follows:
 
 
 
2015
 
2014
 
Increase
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
HPP
 
$
1,593

57
%
 
$
1,231

46
%
 
$
362

 
11
%
TS
 
3,597

17
%
 
2,724

15
%
 
873

 
2
%
Total
 
$
5,190

22
%
 
$
3,955

19
%
 
$
1,235

 
3
%
    
    
The impact of product mix within our HPP segment on gross margin for the three months ended December 31, 2015 and 2014 was as follows:
 
 
 
2015
 
2014
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
Product
 
$
745

38
%
 
$
1,033

42
%
 
$
(288
)
 
(4
)%
Services
 
848

98
%
 
198

86
%
 
650

 
12
 %
Total
 
$
1,593

57
%
 
$
1,231

46
%
 
$
362

 
11
 %

The overall HPP segment gross margin as a percentage of sales increased to 57% for the three month period ended December 31, 2015 as compared to 46% for the three month period ended December 31, 2014. The 4% decrease in gross margin as a percentage of sales for product sales in the HPP segment was primarily attributed to a change in the mix of Myricom products and multicomputer parts sold during the period. The 12% increase of gross margin as a percentage of sales for services in the HPP segment was primarily attributed to recognizing approximately $0.7 million of high margin royalties related to the equivalent number of high speed processing boards used in one and a half aircraft during the three months ended December 31, 2015 as compared to $0.1 million of royalty revenues for the three month period ended December 31, 2014.

    






16



The impact of product mix within our TS segment on gross margin for the three months ended December 31, 2015 and 2014 was as follows:
 
 
2015
 
2014
 
Increase
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
Product
 
$
2,022

13
%
 
$
1,487

11
%
 
$
535

 
2
%
Services
 
1,575

27
%
 
1,237

27
%
 
338

 
—
%
Total
 
$
3,597

17
%
 
$
2,724

15
%
 
$
873

 
2
%

     The increase in TS segment gross margin on product revenues is attributed to higher margins on our U.S. division product revenues.

Engineering and Development Expenses
 
The engineering and development expenses incurred exclusively by our HPP segment were $0.8 million and $0.9 million for the three months ended December 31, 2015 and 2014, respectively. The current year expense was primarily for engineering expenses incurred in connection with the development of new commercial Myricom products and the prior year expense was primarily related to our multicomputer product line.
 
Selling, General and Administrative Expenses
 
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended December 31, 2015 and 2014:
 
 
For the three months ended December 31,
 
2015
 
% of
Total
 
2014
 
% of
Total
 
$ Increase (decrease)
 
% Increase (decrease)
 
(Dollar amounts in thousands)
By Operating Segment:
 
 
 
 
 
 
 
 
 
 
 
HPP segment
$
1,217

 
30
%
 
$
1,235

 
31
%
 
$
(18
)
 
(1
)%
TS segment
2,831

 
70
%
 
2,788

 
69
%
 
43

 
2
 %
Total
$
4,048

 
100
%
 
$
4,023

 
100
%
 
$
25

 
1
 %
 
SG&A expenses were essentially flat at $4.0 million for the three months ended December 31, 2015 as compared to the three months ended December 31, 2014.

Other Income/Expenses
 
The following table details our other income (expense) for the three months ended December 31, 2015 and 2014:
 
For the three months ended,
 
 
 
December 31, 2015
 
December 31, 2014
 
Increase (decrease)
 
(Amounts in thousands)
Interest expense
$
(21
)
 
$
(21
)
 
$
—

Interest income
1

 
3

 
(2
)
Foreign exchange gain (loss)
39

 
(21
)
 
60

Other expense, net
9

 
6

 
3

Total other income (expense), net
$
28

 
$
(33
)
 
$
61


17

 
The increase in other income for the three months ended December 31, 2015 as compared to the three months ended December 31, 2014 was primarily driven by a foreign exchange gain of approximately $39,000 in the current period as compared to a loss of approximately $21,000 in the prior period.

Income Taxes

For the three months ended December 31, 2015, the Company recognized an income tax expense of $88,000, which is primarily due to increased profit in Germany of $445,000, partially offset by a loss of $84,000 in the U.S. The company tax rate was 24% for quarter ended December 31, 2015 which is lower than the normal statutory rate due in large part to a loss in the U.S. and the benefit from the projected R&D credit.


Liquidity and Capital Resources
 
Our primary source of liquidity is our cash and cash equivalents, which decreased by $0.7 million to $10.5 million as of December 31, 2015 from $11.2 million as of September 30, 2015. At December 31, 2015, cash equivalents totaled $0.5 million.
 
Significant sources of cash for the three months ended December 31, 2015 included net income of approximately $0.3 million and a decrease in accounts receivable of approximately $1.4 million.

Significant uses of cash for the three months ended December 31, 2015 included a decrease in deferred revenue of approximately $1.1 million, a decrease in accounts payable and accrued expenses of approximately $0.7 million, and an increase in inventories of approximately $0.6 million.
 
Cash held by our foreign subsidiaries located in Germany and the United Kingdom totaled approximately $3.7 million as of December 31, 2015 as compared to $3.3 million as of September 30, 2015. This cash is included in our total cash and cash equivalents reported above. We consider this cash to be permanently reinvested into these foreign locations.
 
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans, the equity markets, or other means. There is no assurance that we will be able to raise any such capital on terms acceptable to us, on a timely basis or at all. 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 or continue to effectively operate our business.
 
Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash generated from operations and availability on our lines of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for the foreseeable future.

18

Item 4.          Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2015. Our chief executive officer, our chief financial officer, and other members of our senior management team supervised and participated in this evaluation. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2015, the Company’s chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective, due to the fact that we are not yet able to conclude that the material weakness described in this Item 4 below had been remediated by the changes we made in response to that material weakness.

 Internal Controls over Financial Reporting

For the period ended September 30, 2015, management identified a material weakness. A material weakness is a
deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial statements will not be able to be prevented or detected in a timely basis.

The material weakness was related to our controls over the revenue recognition process, specifically that
revenue recognition criteria has been satisfied prior to recognizing revenue and the failure to sufficiently assess gross versus
net revenue indicators to certain revenue transactions. We determined that controls over the revenue recognition process were
not operating effectively and the resulting control gap amounted to a material weakness in our controls over financial reporting.
As a result, we had concluded that the Company’s internal control over financial reporting was not effective as of September
30, 2015. Although we have implemented changes to our internal controls over financial reporting as described below, at this
time we cannot conclude that the material weakness has been remediated.

Changes in Internal Controls over Financial Reporting
               
During the periods following our initial identification of the material weakness referred to above, management assessed various alternatives to remediate this material weakness and we implemented changes to our system of internal controls, which included the implementation of enhanced internal auditing procedures, whereby revenue transactions are subjected to an additional review process at the corporate level to ensure the correct accounting methodology is applied to all revenue transactions. During the twelve months ended September 30, 2015, management took additional action to upgrade our
international accounting staff and improve accounting operations in our European divisions and continued to assess the effectiveness of changes described above during the quarter ended, December 31, 2015.





19

PART II.   OTHER INFORMATION

Item 6.           Exhibits
 
Number
 
Description
31.1*
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2*
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1*
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
 
Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2015 and September 30, 2015, (b) our Consolidated Statements of Operations for the three months ended December 31, 2015 and 2014, (c) our Consolidated Statements of Comprehensive Income for the three months ended December 31, 2015 and 2014, (d) our Consolidated Statement of Shareholders’ Equity for the three months ended December 31, 2015, (e) our Consolidated Statements of Cash Flows for the three months ended December 31, 2015 and 2014 and (f) the Notes to such Consolidated Financial Statements.

 
 
*Filed Herewith


20

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
CSP INC.
 
 
 
Date: February 16, 2016
By:
/s/ Victor Dellovo
 
 
Victor Dellovo
 
 
Chief Executive Officer,
 
 
President and Director
 
 
 
Date: February 16, 2016
By:
/s/ Gary W. Levine
 
 
Gary W. Levine
 
 
Chief Financial Officer


21

Exhibit Index

Number
 
Description
31.1*
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2*
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1*
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
 
Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2015 and September 30, 2015, (b) our Consolidated Statements of Operations for the three months ended December 31, 2015 and 2014, (c) our Consolidated Statements of Comprehensive Income for the three months ended December 31, 2015 and 2014, (d) our Consolidated Statement of Shareholders’ Equity for the three months ended December 31, 2015 (e) our Consolidated Statements of Cash Flows for the three months ended December 31, 2015 and 2014 and (f) the Notes to such Consolidated Financial Statements.

 
*Filed Herewith

22