UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2015 .
¨ 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 000-10843
CSP Inc.
(Exact name of Registrant as specified in its Charter)
Massachusetts
(State of incorporation)
04-2441294
(I.R.S. Employer Identification No.)
175 Cabot Street, Lowell, Massachusetts 01852 (978) 663-7598
(Address and telephone number of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Name of Exchange of Which Registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No x
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 ¨
.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x
No ¨
.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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.
Large accelerated filer ¨
Non-accelerated filer ¨
Accelerated filer ¨
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 ¨
No x
As of March 31, 2015, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $23,325,566 based on the closing sale price
of $6.78 as reported on the Nasdaq Global Market.
As of December 2, 2015, we had outstanding 3,687,894 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the information required in Part III of this Form 10-K are incorporated by reference from our definitive proxy statement for our 2016 annual meeting
of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30, 2015 .
TABLE OF CONTENTS
PART I.
Item 1.
Business
Item 1A.
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Change in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships, Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Exhibits and Financial Statement Schedules
Note: Items 1B, 6 and 7A are not required for Smaller Reporting Companies and therefore are not furnished.
i
Page
1
8
13
13
13
14
15
25
25
26
27
27
27
28
28
28
29
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. This information may involve known and unknown risks, uncertainties and
other factors that are difficult to predict and may cause our actual results, performance or achievements to be materially different from future results, performance
or achievements expressed or implied by any 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. 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 this Annual Report.
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. We have based the
forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report, and we assume no
obligation to update any such forward-looking statements, other than as required by law. Although we undertake no obligation to revise or update any forward-
looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make
directly to you or through reports that we, in the future, may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K.
All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to elsewhere in
this annual report. Unless otherwise indicated, the information in this annual report is as of September 30, 2015.
Item 1.
Business
PART I
CSP Inc. (“CSPI” or “the Company” or “we” or “our”) was incorporated in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of
our commercial, and defense customers worldwide, CSPI and its subsidiaries develop and market IT integration solutions, advanced security and managed services
and purpose built network adapters, as well as high-performance cluster computer systems.
Segments
CSPI operates in two segments; High Performance Products ("HPP") and Technology Solutions ("TS").
HPP Segment
•
The HPP segment designs and manufactures computing systems for digital signal processing ("DSP") applications within the defense market and network
Ethernet adapters that are offered to both commercial and government customers. Our DSP revenue flows from a modest number of high-value
customers.
1
•
•
•
•
In addition, we continue to design and manufacture new product lines for our Myricom network Ethernet adapters that support the Company's HPP
Segment. The Myricom product line of network Ethernet adapters target three specialized markets: (1) packet capture, (2) financial transactions and (3)
storage interconnect market. The packet capture market includes government applications as well as original equipment manufacturer ("OEM") sales into
vendors of computer security appliances. Our financial transactions customers are banks, brokerages, and other trading firms looking for low latency
adapters with value-added features specifically tied to market data feeds. Our access to storage subsystems customers are primarily using our adapters for
film editing but we also derive revenue from supercomputer installations and cable head ends.
In fiscal year 2015, we continued to invest in R&D for a new generation of 100G network adapter products, and we expect to start to generate revenue
from sales of these new products in fiscal year 2016. We sell our networking products primarily through third-party distributors.
Our Ethernet adapter products have a lower average selling price ("ASP") than our signal processing products but sell in much higher volumes.
TS Segment
The TS segment consists of the computer managed services, integration services, and third-party computer hardware and software value added reseller
(“VAR”) businesses of our wholly-owned Modcomp subsidiary (“TS”), which operates in the United States, Germany and the United Kingdom. TS
markets and sells services and third party products through its own direct sales force. TS provides professional services for complex IT environments,
including advanced security; unified communications and collaboration; wireless and mobility; data center solutions; and network solutions. TS also
provides managed IT services. The Company leverages its IT expertise into a variety of vertical markets, including automotive; defense; healthcare;
education; federal, state and local government; maritime; and many others.
Sales Information by Industry Segment
The following table details our sales by operating segment for fiscal years ending September 30, 2015 and 2014 . Additional segment and geographical
information is set forth in Note 14 to our financial statements.
Segment
HPP
TS
Total Sales
HPP Segment
Products and Services
2015
%
2014
%
(Dollar amounts in thousands)
$
$
13,948
75,358
89,306
16% $
84%
100% $
14,535
70,084
84,619
17%
83%
100%
In the HPP segment, we design, manufacture and deliver products and services to customers that require specialized networking and signal processing.
Our DSP product line (also referred to as the "Multicomputer" product portfolio) utilizes commercially available, industry standard compliant hardware
components and open source software to deliver high-performance, high density and low power consuming computer solution to our customers. These systems
incorporate tens to hundreds of processors, interconnected by a high-bandwidth network. They are specifically designed for analysis of complex signals and images
in real-time or in modeling and simulations. CSPI's experience in processing density, large memory subsystems, high-bandwidth networking components,
optimized signal processing libraries, and specialized algorithms facilitate use of these DSP products in the military/defense markets.
2
Our Ethernet adapters and solutions product line (also referred to as the “Myricom" product line) consist of high performance 10 Gigabit Ethernet adapters
and application software specialized for vertical markets. By optimizing latency, throughput and cost, these solutions address the requirements of applications in
the packet capture, financial transaction, broadcast video and media markets.
Products
CSPI’s HPP segment continues to offer the Multicomputer product portfolio including its 2000 SERIES VME and 3000 SERIES VXS systems. The 2000
SERIES products, with PowerPC RISC processors with AltiVec™ technology, high-speed memory and Myrinet-2000™ cluster interconnect are in deployment by
customers in the aerospace, commercial and defense markets seeking Commercial-Off-The-Shelf (“COTS”) solutions to reduce costs and ensure widespread
availability.
The 3000 SERIES VXS product line, incorporating the Freescale QorIQ PowerPC processors with AltiVec technology, delivers next generation performance
to its predecessor products in interconnect bandwidth and processing density while preserving absolute code reuse at the application layer. The 3000 SERIES VXS
product line targets high performance DSP, signal intelligence (“SIGINT”), radar and sonar applications in airborne, shipboard and unmanned aerial vehicle
(“UAV”) platforms where space, power and cooling are at a premium. With its built-in 10 Gigabit Ethernet technology, the 3000 SERIES VXS supports the most
prevalent networking standard found in both business and industrial settings.
With the purchase of the Myricom assets on November 4, 2013, the HPP segment acquired the interconnect technology critical to its latest generation of
Multicomputer products as well as a strong base of new customers in commercial growth markets. Since the acquisition, the Company has offered Myricom Myri-
10G Ethernet adapters and associated network adapter software. Myri-10G is a family of high performance 10 Gigabit Ethernet adapters for Linux, Windows, Mac
OS X and VMware ESX.
During fiscal year 2015, CSPi launched the fourth generation of the Myricom network adapter product line. These adapters are purpose built for complex and
demanding applications including automated trading and network monitoring. The 10 Gigabit Ethernet adapters ship with our DBL™ software, and target
customers seeking ultra low latency to speed up financial trading applications. In addition, the adapters feature advanced server functions, such as A/B arbitration,
and precision timestamping accuracy required for regulatory compliance. In addition, our network adapters continue to meet the critical requirements of
accessibility and lossless data retrieval for media collaboration with 10GBASE-T adapters added to the list of Myricom adapters tested and qualified for use with
the Avid® MediaCentral™ Platform. The latest version of the Sniffer10G application programming interface provides enterprise and government customers the
ability to capture, inject, and analyze all network traffic at line rate on a 10 Gigabit Ethernet network. Our 100% lossless packet capture and packet injection, this
performance enables thorough inspection of the network traffic to provide better detection of threats for cyber security environments. Sniffer10G serves a number
of market segments including network surveillance, deep packet inspection and as a critical technology component within distributed denial-of-service (DDoS)
defense appliances.
Royalties
We license the design of certain of our 2000 SERIES computer processor boards and switched interconnect technology to third parties. In exchange for licensing
this technology, we receive a royalty payment for each processor board that the licensee produces that utilizes our design for these products.
Markets, Marketing and Dependence on Certain Customers
Aerospace & Defense Market
We market our Multicomputer products to defense and commercial markets with an emphasis on applications requiring the analysis of complex signals such
as sonar, radar, seismic exploration and scientific/engineering research. We commercially distribute our products in these markets as an OEM supplier to system
integrators, distributors and value-added resellers.
In the case of sales to the government, the prime contractor will typically incorporate our products into its own future product developments and, therefore,
will need early access to low-level, detailed technical specifications and prototype units. These prime contractors typically demand long term product availability
and support. As a supplier in this market, we recognize that there may be a significant up-front investment of time and resources in building business relationships.
However,
3
the result of this type of long-standing and committed business relationship is a strong potential for long-term revenue streams as programs progress from
development phases into deployment.
Our use of high performance embedded computing technologies to support information exchange in real-time is becoming increasingly significant to 21 st
century “network centric warfare” military operations. In addition to upgrades of existing military programs, there has been steady growth of new programs
requiring signal/image processing and analysis equipment. However, the efficiency inherent in these technologies reduces the number of systems required to
achieve the same results. Both new and upgraded programs require a substantial investment in development and evaluation before products deploy into field use.
The time from development to deployment varies by program and often extends beyond twenty-four months. Our focus for fiscal 2016 and beyond is to continue to
build interest in our 3000 SERIES VXS products that integrate the latest PowerPC with AltiVec ™ processors, while continuing to support established products and
existing customer relationships.
Financial Transactions Market
Myricom network adapters with DBL™ application software address the need for the ultra-low latency required in the world of financial trading. Running
DBL™ on Myri-10G extreme performance network adapters provides unmatched acceleration for 10 Gigabit Ethernet environments, with benchmarked
application-to-application latency in the single digit microseconds for Linux and Microsoft Windows operating systems.
Packet Capture Market
Myricom Sniffer10G software, running on Myri-10G 10 Gigabit Ethernet adapters, provides enterprise and government customers and partners the ability to
capture, inject, and analyze network traffic at line rate for all Ethernet packet sizes, with low host-CPU overhead. Sniffer10G serves the following market
segments: network surveillance, monitoring and analysis; test, measurement and packet generation; deep packet inspection (DPI); and as a critical technology
component within distributed denial-of-service (DDoS) defense appliances.
Storage Interconnect Market
Myricom network adapters are used in a wide range of applications that connect to storage subsystems using Ethernet. Most of these customers are using
content creation applications from the storage system to video editing work stations. We also have customers in the supercomputing market and building cable
head ends. These adapters with the Myri10GE software deliver best in class throughput performance for Ethernet controllers.
Competition
The markets for our HPP segment are very competitive. Customer requirements coupled with advances in technology drive our efforts to continuously
improve existing products and develop new ones. Applications expertise, product innovation, strong technical support and dedicated customer service allow us to
compete as a provider of high-performance products and solutions.
Our direct competitors for the Multicomputer products are Mercury Systems Inc., Kontron, Curtis Wright, and G. E. Intelligent Platforms, among others. Our
indirect competitors are the board manufacturers that specialize in the DSP segment of this market. In the past, manufacturers such as Emerson, HP, IBM and Dell
participated in the low performance segment of the general-purpose computer and single board computer market. Today, those companies manufacture general-
purpose computer systems incorporating multi-core processors and are formidable competitors in computation-intensive applications, such as radar and sonar.
While we believe our products are designed to offer superior overall value in combined performance, features and price, we may not be able to overcome the
capabilities of these much larger companies to address the needs of the cost sensitive customer, where price, as opposed to system performance, size and
specialized packaging, is the primary factor in the buying decision.
A continued presence in this market depends upon maintaining our strategic partnerships with prime contractors and providing high density and scalability in
a compact, low power and cost effective package that can easily be integrated into OEM designs for high performance computation. Since the majority of sales are
to prime contractors, the principal barrier to gaining market share is the reluctance of established users to redesign products currently in production. A key area of
opportunity exists in design wins on new programs.
4
Our primary direct competitors for the Myricom products are Solarflare and Intel, among others. In specific application areas we also compete with Napatech
and Accolade Technology for the packet processing business; Small Tree, ATTO, and Chelsio in the content creation/post production markets; and Mellanox in the
Financial Services arena.
Intel solutions will remain attractive to customers in markets that require the lowest price and whose needs are met by commodity hardware adapters. To
compete, the Myricom products must offer a value proposition based on enhanced features, such as support of faster (40/100GbE) networks, precision time
stamping and lossless packet capture, to justify our price differential.
Manufacturing, Assembly and Testing
Currently, all Multicomputer systems are shipped to our customers directly from our plant in Lowell, Massachusetts. Our manufacturing activities consist
mainly of final assembly and testing of printed circuit boards and systems that are designed by us and fabricated by outside third party vendors.
Upon receipt of material and components by us from outside suppliers, our quality assurance technicians inspect these products and components. During
manufacture and assembly, both sub-assemblies and completed systems are subjected to extensive testing, including burn-in and environmental stress screening
designed to minimize equipment failure at delivery and over the useful service life of the system. We also use diagnostic programs to detect and isolate potential
component failures. A comprehensive log is maintained of past failures to monitor the ongoing reliability of our products and improve design standards.
Currently, Myricom products are shipped to our customers directly from our plants in Pasadena, California and Lowell, Massachusetts. Our network adapters
are designed by us and fabricated by outside third party vendors. Material and components received from outside suppliers are inspected by our quality assurance
technicians.
With respect to the products described above, we provide a warranty covering defects arising from products sold and service performed, which varies from 90
days to three years, depending upon the particular unit in question.
Sources and Availability of Raw Materials
Several components used in our HPP segment products are obtained from sole-source suppliers. We are dependent on key vendors such as Freescale
Semiconductor, Inc. for PowerPC processors for our 2000 SERIES and our 3000 SERIES VXS products and Wind River Systems, Inc. for VxWorks operating
system software. Despite our dependence on these sole-source suppliers, based on our current forecast, we do not consider the risk of interruption of supply to be
significant to meet our projected sales obligations over the the near term, because we have adequate inventory on hand and/or our current requirements can be met
in the existing supply chain.
Research and Development
For the year ended September 30, 2015 , our expenses for R&D were approximately $2.8 million compared to approximately $3.5 million for fiscal year
2014 . Expenditures for R&D are expensed as they are incurred. Product development efforts in fiscal year 2015 involved enhancements to our Myricom products,
into which we expect to continue to make investments related to the development of new hardware adapter products and the software that enables the hardware to
meet the needs of specific applications. Our current R&D plan is intended to extend the usefulness and marketability of these products by reducing latency,
improving precision time stamping capabilities, and adding features, such as enhanced arbitration, to deliver products fine-tuned to meet the needs of our markets.
Patent rights are not material to our business.
Backlog
The backlog of customer orders and contracts in the HPP segment was approximately $1.6 million at September 30, 2015 as compared to $0.2 million at
September 30, 2014 . Our backlog can fluctuate greatly. These fluctuations can be due to the timing of receipt of large orders often for purchases from prime
contractors for sales to the government. It is expected that all of the customer orders in backlog will ship within the next twelve months.
5
TS Segment
Products and Services
Integration Solutions
In the TS segment, we focus on VAR integrated solutions including third-party hardware, software and technical computer-related consulting services and
managed services. Our value proposition is our ability to integrate diverse third-party components together into a complete solution and install the system at the
customer site and to offer high value IT consulting services to deliver solutions.
Third-Party Hardware and Software
Our wholly-owned subsidiary, Modcomp, sells third-party hardware and software products in the information technology market, with a strategic focus on
industry standard servers and data center infrastructure solutions, midrange data storage infrastructure products, network products, unified communications and IT
security hardware and software solutions. Our key offerings include products from HP, Cisco Systems, IBM, Juniper Networks, Dell, Citrix, EMC, Intel, VMWare,
Fortinet, nCircle, Microsoft, Arcsight and Checkpoint. Through our business relationships with these vendors, we are able to offer competitively priced robust
products to meet our customers' diverse technology needs, providing procurement and engineering expertise in server infrastructure, storage, security, unified
communications and networking, to the small-to-medium sized businesses (“SMBs”) and large enterprise businesses (“LEBs”) with complex IT environments. We
offer our customers a single point of contact for complex multi-vendor technology purchases. Many of our SMB customers have unique technology needs and may
lack technical purchasing expertise or have very limited IT engineering resources on staff. We also provide installation, integration, logistical assistance and other
value-added services that customers may require. Our current customers are in web and infrastructure hosting, education, telecommunications, healthcare services,
distribution, financial services, professional services and manufacturing. We target SMB and LEB customers across all industries.
Professional Services
We provide professional IT consulting services in the following areas:
•
•
•
•
•
•
Implementation, integration, migration, configuration, installation services and project management.
Unified Storage Platforms ("USPs"). We help our customers implement USP solutions using products from Dell, EMC, HP and NetApp. USPs have
advantages over conventional storage architecture, which include cost savings from better utilization of hardware and lower headcount requirements to
run and maintain data storage systems, higher availability and faster data access rates resulting in increased productivity.
Virtualization. We implement virtualization solutions using products from companies such as VMWare and Citrix. Virtualization allows one computer
to do the job of multiple computers by sharing resources of a single computer across multiple environments. With virtual servers and desktops, users can
host multiple operating systems and applications, which can eliminate physical and geographical limitations. Other benefits include energy cost savings,
lower capital expenditure requirements, high availability of resources, better desktop management, increased security and improved disaster recovery
processes.
Enterprise security intrusion prevention, network access control and unified threat management. Using third-party products from companies like
Checkpoint, Palo Alto, Juniper Networks and Cisco Systems, our services are designed to ensure data security and integrity through the establishment of
virtual private networks, firewalls and other technologies.
IT security compliance services. We provide services for IT security compliance with personal privacy laws such as the Payment Card Industry Data
Security Standard (PCI DSS), t he Health Insurance Portability and Accountability Act of 1996 ( HIPAA), and internal control regulations under the
Sarbanes-Oxley Act (SOX).
Unified communications, wireless and routing and switching solutions using Cisco Systems and Aruba Networks products and services.
6
•
Custom software applications and solutions development and support. We develop custom applications to customer specifications using industry
standard platforms such as Microsoft.Net, SharePoint and OnBase. We are a Microsoft Gold Partner.
• Managed IT services that include monitoring, reporting and management of alerts for the resolution and preventive general IT and IT security support
tasks.
• Maintenance and technical support both for third-party products and proprietary Modcomp legacy PCDA systems, including hardware and software,
operating system and user support.
Markets, Marketing and Dependence on Certain Customers
We are an IT systems integrator and computer hardware and software VAR. We also provide technical services to achieve a value-add to our customers. We
operate within the VAR sales channels of major computer hardware and software OEMs, primarily within the geographic areas of our sales offices and across the
U.S. We provide innovative IT solutions, including a myriad of infrastructure products with customized integration consulting services and managed services to
meet the unique requirements of our customers. We market the products and services we sell through sales offices in the U.S., Germany and the U.K. using our
direct sales force (for a list of our locations, see Item 2 of this Form 10-K).
Competition
The primary competition in the TS segment is other VARs ranging from small companies that number in the thousands, to large enterprises such as CDW,
PC Connection, Insight, MoreDirect, Dimension Data, Bechtle AG, Presidio and Computacenter AG & Co oHG. In addition, we compete directly with many of the
companies who manufacture the third-party products that we sell, including Cisco Systems, IBM, HP EMC and others. In the network management, security and
storage systems integration services business, our competitors are extensive and vary to a certain degree in each of the geographical markets, but they include such
competitors as HP/EDS, IBM and Cap Gemini.
Nearly all of our product offerings are available through other channels. Favorable competitive factors for the TS segment include procurement capability,
product diversity which enables the delivery of complete and custom solutions to our customers and the strength of our key business relationships with the major
IT OEMs. We also consider our ability to supply unique and/or specialized needs of the SMB and LEB markets and our strong knowledge of the IT products that
we sell to be a key competitive advantage. Our ability to provide managed services through our network operations center and the consulting integration services
required to design and install the custom solutions that fit our customers' IT needs are distinct competitive advantages. Unfavorable competitive factors include low
name recognition, limited geographic coverage and pricing.
Backlog
The backlog of customer orders and contracts for the TS segment was approximately $10.1 million at September 30, 2015 , as compared to $6.6 million at
September 30, 2014 . Our backlog can fluctuate greatly. These fluctuations can be due to the timing of receiving large orders for third- party products and/or IT
services. It is expected that all of the customer orders in backlog will ship and/or be provided during fiscal year 2016.
Significant Customers
See Note 14 to the notes to the consolidated financial statements for detailed information regarding customers which comprised 10% or more of consolidated
revenues for the years ended September 30, 2015 and 2014 .
Employees
On September 30, 2015 , we had approximately 172 full time equivalent employees worldwide for our consolidated operations. None of our employees are
represented by a labor union and we have had no work stoppages in the last three fiscal years. We consider relations with our employees to be good.
Financial Information about Geographic Areas
Information regarding our sales by geographic area and percentage of sales based on the location to which the products are shipped or services are rendered
are in Note 14 to the notes to the consolidated financial statements.
7
Item 1A.
Risk Factors
If any of the risks and uncertainties set forth below actually materialize, our business, financial condition and/or results of operations could be
materially and adversely affected, the trading price of our common stock could decline and a stockholder could lose all or part of his or her investment. The
risks and uncertainties set forth below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider
immaterial may also impair our business operations.
We depend on a small number of customers for a significant portion of our revenue and loss of any customer could significantly affect our business
We are dependent on a small number of customers for a large portion of our revenues. For the fiscal year ended September 30, 2015, just two customers
accounted for approximately $31.4 million in revenue, or 35% of our total revenues for the fiscal year. Both the HPP and TS segments are reliant upon a small
number of significant customers, the loss of any one of which could have a material adverse effect on our business. A significant reduction in the sales to or loss of
any of our major customers would have a material adverse effect on our business, financial condition and results of operations. In addition, 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.
We depend on contracts with the federal government for a significant portion of our revenue, and our business could be seriously harmed if the government
significantly decreased or ceased doing business with us.
We derived 5% of our total revenue in fiscal year 2015 and 7% of our total revenue in fiscal year 2014 from the Department of Defense ("DoD") as a
subcontractor. We expect that the DoD contracts will 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, and
sequestration is not alleviated, it could continue to have significant consequences to 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
prime 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:
•
•
•
cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
claim rights in systems and software developed by us;
suspend or debar us from doing business with the federal government or with a governmental agency;
8
•
•
impose fines and penalties and subject us to criminal prosecution; and
control or prohibit the export of our data and technology.
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 rely on single sources for supply of certain components and our business may be seriously harmed if our supply of any of these components or other
components is disrupted
Several components used in our HPP products are currently obtained from sole-source suppliers. We are dependent on key vendors like Mellanox
Technologies for our high-speed interconnect components. Generally, suppliers may terminate their purchase orders with us without cause upon 30 days' notice
and may cease offering products to us upon 180 days' notice. Although we do not consider the risk of interruption of supply to be a significant risk in the near term,
if in the future, Mellanox Technologies were to limit or reduce the sale of such components to us, or if these or other component suppliers, some of which are small
companies, were to experience future financial difficulties or other problems which could prevent them from supplying the necessary components, such events
could have a material adverse effect on our business, financial condition and results of operations. These sole source and other suppliers are each subject to quality
and performance risks, materials shortages, excess demand, reduction in capacity and other factors that may disrupt the flow of goods to us or our customers,
which thereby may adversely affect our business and customer relationships.
We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers will continue to meet our requirements. If
our supply arrangements are interrupted, there can be no assurance that we would be able to find another supplier on a timely or satisfactory basis. Any shortage or
interruption in the supply of any of the components used in our products, or the inability to procure these components from alternate sources on acceptable terms,
could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that severe shortages of components
will not occur in the future. Such shortages could increase the cost or delay the shipment of our products, which could have a material adverse effect on our
business, financial condition and results of operations. Significant increases in the prices of these components would also materially adversely affect our financial
performance since we may not be able to adjust product pricing to reflect the increase in component costs. We could incur set-up costs and delays in manufacturing
should it become necessary to replace any key vendors due to work stoppages, shipping delays, financial difficulties or other factors and, under certain
circumstances, these costs and delays could have a material adverse effect on our business, financial condition and results of operations.
Our international operations are subject to a number of risks
We market and sell our products in certain international markets and we have established operations in the U.K. and Germany. Foreign-based revenue is
determined based on the location to which the product is shipped or services are rendered and represented 34% and 37% of our total revenue for the fiscal years
ended September 30, 2015 and 2014, respectively. If revenues generated by foreign activities are not adequate to offset the expense of establishing and maintaining
these foreign subsidiaries and 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. 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.
We depend on key personnel and skilled employees and face competition in hiring and retaining qualified employees.
9
We are largely dependent upon the skills and efforts of our senior management, managerial, sales and technical employees. None of our senior management
personnel or other key employees are subject to any employment contracts except Victor Dellovo, our Chief Executive Officer and President. The loss of services
of any of our executives or other key personnel could have a material adverse effect on our business, financial condition and results of operations. Our future
success will depend to a significant extent on our ability to attract, train, motivate and retain highly skilled technical professionals. Our ability to maintain and
renew existing engagements and obtain new business depends, in large part, on our ability to hire and retain technical personnel with the skills that keep pace with
continuing changes in industry standards and technologies. The inability to hire additional qualified personnel could impair our ability to satisfy our growing client
base, requiring an increase in the level of responsibility for both existing and new personnel. There can be no assurance that we will be successful in retaining
current or future employees.
Systems failures may disrupt our business and have an adverse effect on our results of operations.
Any systems failures, including network, software or hardware failures, whether caused by us, a third 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. 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 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.
In addition, the failure or disruption of our email, communications or utilities could cause us to interrupt or suspend our operations or otherwise harm our
business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or
operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated.
The systems and networks that we maintain for our clients, although highly redundant in their design, could also fail. If a system or network we maintain
were to fail or experience service interruptions, we might experience loss of revenue or face claims for damages or contract termination. Our errors and omissions
liability insurance may be inadequate to compensate us for all the damages that we might incur and, as a result, our actual results could differ materially and
adversely from those anticipated.
We face competition that could adversely affect our sales and profitability.
The markets for our products are highly competitive and are characterized by rapidly changing technology, frequent product performance improvements and
evolving industry standards. Many of our competitors are substantially larger than we are and have greater access to capital and human resources and in many
cases price their products and services less than ours. In addition, due to the rapidly changing nature of technology, new competitors may emerge. Competitors may
be able to offer more attractive pricing or develop products that could offer performance features that are superior to our products, resulting in reduced demand for
our products. Such competitors could have a negative impact on our ability to win future business opportunities. There can be no assurance that a new competitor
will not attempt to penetrate the various markets for our products and services. Their entry into markets historically targeted by us may have a material adverse
effect on our business, financial condition and results of operations.
Our operating results may fluctuate significantly.
Our operating results have fluctuated widely on a quarterly and annual basis during the last several years and we expect to experience significant fluctuations
in future operating results. Many factors, some of which are beyond our control, have contributed to these fluctuations in the past and may continue to do so. Such
factors include:
•
•
•
sales in relatively large dollar amounts to a relatively small number of customers;
competitive pricing programs and volume discounts;
loss of customers;
10
•
•
•
•
•
•
•
•
•
•
•
•
•
•
market acceptance of our products;
product obsolescence;
general economic conditions;
change in the mix of products sold;
whether or not we are able to secure design wins for significant customer systems;
timing of significant orders;
delays in completion of internal product development projects;
delays in shipping our products;
delays in acceptance testing by customers;
production delays due to quality programs with outsourced components;
shortages of components;
timing of product line transitions;
declines of revenues from previous generations of products following announcement of replacement products containing more advance technology; and
fixed nature of our expenditures on personnel, facilities and marketing programs.
We believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and should not be relied upon as indicative of
our future performance. It is also possible that in some periods, our operating results may be below the expectations of securities analysts and investors. In such
circumstances, the price of our common stock may decline.
To be successful, we must respond to the rapid changes in technology . If we are unable to do so on a timely basis our business could be materially adversely
affected.
Our future success will depend in large part on our ability to enhance our current products and to develop new commercial products on a timely and cost-
effective basis in order to respond to technological developments and changing customer needs. The design-in process is typically lengthy and expensive and there
can be no assurance that we will be able to continue to meet the product specifications of our customers in a timely and adequate manner. In addition, if we fail to
anticipate or to respond adequately to changes in technology and customer preferences, or if there is any significant delay in product developments or
introductions, this could have a material adverse effect on our business, financial condition and results of operations, including the risk of inventory obsolescence.
Because of the complexity of our products, we have experienced delays from time to time in completing products on a timely basis. If we are unable to design,
develop or introduce competitive new products on a timely basis, our future operating results would be adversely affected, particularly in our HPP segment. There
can be no assurance that we will be successful in developing new products or enhancing our existing products on a timely or cost-effective basis, or that such new
products or product enhancements will achieve market acceptance.
We need to continue to expend resources on research and development efforts, particularly our HPP segment, to meet the needs of our customers. If we are
unable to do so, our products could become less attractive to customers and our business could be materially adversely affected.
As a result of our need to maintain or increase our spending levels for R&D in this area and the difficulty in reducing costs associated with R&D, our
operating results could be materially harmed if our revenues fall below expectations. In addition, as a result of CSPI's commitment to invest in R&D, spending as a
percent of revenues may fluctuate in the future.
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting.
11
Our management identified an internal control material weakness as of March 31, 2014. 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 prevented or detected in a timely basis.
The material weakness is in connection with our controls over the revenue recognition process, specifically that revenue recognition criteria have 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, 2014.
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.
Effective internal control over financial reporting and disclosure controls and procedures are necessary in order for us to provide reliable financial and other
reports and effectively prevent fraud. These types of controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the
proper preparation of our financial statements, as well as regarding the timely reporting of material information. If we cannot maintain effective internal control or
disclosure controls and procedures, or provide reliable financial statements or SEC reports or prevent fraud, investors may lose confidence in our reported financial
information, our common stock could be subject to delisting on the stock exchange where it is traded, our operating results and the trading price of our common
stock could suffer and we might become subject to litigation.
While our management will continue to review the effectiveness of our internal control over financial reporting and disclosure controls and procedures, there
is no assurance that our disclosure controls and procedures or our internal control over financial reporting will be effective in accomplishing all control objectives,
including the prevention and detection of fraud, all of the time.
Our stock price may continue to be volatile
Historically, the market for technology stocks has been extremely volatile. Our common stock has experienced and may continue to experience, substantial
price volatility. The following factors could cause the market price of our common stock to fluctuate significantly:
•
•
•
•
•
•
•
•
•
•
loss of a major customer;
loss of a major supplier;
the addition or departure of key personnel;
variations in our quarterly operating results;
announcements by us or our competitors of significant contracts, new products or product enhancements;
acquisitions, distribution partnerships, joint ventures or capital commitments;
regulatory changes;
sales of our common stock or other securities in the future;
changes in market valuations of technology companies; and
fluctuations in stock market prices and volumes.
In addition, the stock market in general and the NASDAQ Global Market and technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors
may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class action litigation has often been instituted against such companies.
You should not rely our forward looking statement as a prediction of actual future financial condition or results.
12
Item 2.
Properties
Listed below are our principal facilities as of September 30, 2015 . Management considers all facilities listed below to be suitable for the purpose(s) for
which they are used, including manufacturing, research and development, sales, marketing, service and administration.
Location
Principal Use
Owned or
Leased
Approximate
Floor Area
Corporate Headquarters
Manufacturing, Sales,
Marketing and
Administration
Sales, Marketing and
Administration
Division Headquarters
Sales, Marketing and
Administration
Leased
11,450 S.F.
Leased
2,450 S.F.
Leased
11,815 S.F.
Sales, Marketing, Service
Leased
12,443 S.F.
and Administration
Sales, Marketing and
Administration
Leased
2,490 S.F.
HPP Segment Properties:
CSP Inc.
43 Manning Road
Billerica, MA
CSP Inc., DBA Myricom
3871 East Colorado Blvd
Pasadena, CA
TS Segment Properties:
Modcomp, Inc.
1182 East Newport Center Drive
Deerfield Beach, FL
Modular Computer Systems GmbH
Oskar-Jager-Strasse 50
D-50825 Koln
Germany
Modcomp, Ltd.
12a Oaklands Business Park, Fishponds Road
Wokingham Berkshire
United Kingdom
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not Applicable.
13
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market information . Our common stock is traded on the Nasdaq Global Market under the symbol CSPI. The following table provides the high and low
sales prices of our common stock as reported on the Nasdaq Global Market for the periods indicated.
Fiscal Year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2015
2014
High
Low
High
Low
$ 8.34
$ 6.90
$ 8.39 $
7.79
7.79
7.19
6.18
6.46
5.30
8.79
7.89
8.48
6.71
7.29
6.50
6.80
Stockholders . We had approximately 86 holders of record of our common stock as of December 23, 2015. This number does not include stockholders for
whom shares were held in a “nominee” or “street” name. We believe the number of beneficial owners of our shares of common stock (including shares held in
street name) at that date was approximately1,600.
Dividends . On December 17, 2013, our board of directors declared a cash dividend of $0.10 per share which was paid on January 7, 2014 to stockholders
of record as of December 27, 2013. On February 11, 2014, our board of directors declared a cash dividend of $0.11 per share which was paid on March 11, 2014 to
stockholders of record as of February 27, 2014. On May 14, 2014, our board of directors declared a cash dividend of $0.11 per share which was paid on June 10,
2014 to stockholders of record as of May 30, 2014. On August 6, 2014, our board of directors declared a cash dividend of $0.11 per share which was paid on
August 29, 2014 to stockholders of record as of August 21, 2014, the record date.
On December 16, 2014, the Company's board of directors declared a cash dividend of $0.11 per share which was paid
on January 8, 2015 to shareholders of record as of December 28, 2014, the record date. On February 11, 2015, the Company's board of directors declared a cash
dividend of $0.11 per share which was paid on March 12, 2015 to shareholders of record as of February 26, 2015, the record date. On May 13, 2015, the
Company's board of directors declared a cash dividend of $0.11 per share which was paid on June 10, 2015 to shareholders of record as of May 29, 2015, the
record date. On August 12, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on September 11, 2015 to
shareholders of record as of August 26, 2015, the record date.
On December 23, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which will be paid
on January 11, 2016 to shareholders of record as of December 31, 2015, the record date.
14
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations and other portions of this filing contains forward-looking
information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information. 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
Overview of Fiscal 2015 Results of Operations
Revenue increase d by approximately $4.7 million , or 6% , to $89.3 million for the twelve months ended September 30, 2015 versus $84.6 million for the
twelve months ended September 30, 2014 .
Our gross profit margin percentage decrease d overall, from 25% of revenues for the twelve months ended September 30, 2014 to 21% for the twelve
months ended September 30, 2015 . The fiscal year 2015 gross margin decrease is primarily attributed having one less high margin plane related royalty, changes
in product mix and the impact of cost overruns in our U.K. division.
We generated operating income of approximately $0.2 million for the fiscal year ended September 30, 2015 compared to $1.7 million of operating income
for the fiscal year ended September 30, 2014 .
The following table details our results of operations in dollars and as a percentage of sales for the fiscal years ended :
Sales
Costs and expenses:
Cost of sales
Engineering and development
Selling, general and administrative
Total costs and expenses
Bargain purchase gain, net of tax
Operating income
Other expense
Income before income taxes
Income tax expense
Net income (loss)
Revenues
September 30,
2015
%
of sales
September 30, 2014
%
of sales
$
89,306
100 % $
84,619
100 %
(Dollar amounts in thousands)
70,119
2,826
16,135
89,080
—
226
(210)
16
226
(210)
79 %
3 %
18 %
100 %
— %
— %
— %
— %
— %
— % $
$
63,798
3,484
16,116
83,398
462
1,683
(228)
1,455
121
1,334
76 %
4 %
19 %
99 %
1 %
2 %
— %
2 %
— %
2 %
Revenue increase d by approximately $4.7 million , or 6% , to $89.3 million for the twelve months ended September 30, 2015 versus $84.6 million for the
twelve months ended September 30, 2014 . HPP revenue decrease d by approximately $0.6 million and TS revenues increase d by $5.3 million . The HPP segment
revenue decrease is attributed to having one less plane royalty and lower Multicomputer repair volumes, which was partially offset by increased Myricom product
revenue. The TS segment revenues for our U.S. and U.K. divisions were $5.8 million and $1.7 million higher, respectively, than the prior year, but were partially
offset by a $2.2 million decrease in revenue for our German division.
15
HPP segment revenue change by product line for the twelve months ended September 30 was as follows :
(Dollar amounts in thousands)
Increase (Decrease)
Product
Services
Total
2015
2014
$
%
$
$
9,894 $
9,151 $
4,054
5,384
13,948 $
14,535 $
743
(1,330)
(587)
8 %
(25)%
(4)%
The increase in HPP product revenues for fiscal year 2015 compared to fiscal year 2014 was the result of an increase in Myricom product revenues. This
increase in product revenues was more than offset by the reduction in service revenues attributed to lower plane related royalties and the timing of repairs. The
HPP segment recognized approximately $4.5 million of royalty and licensing revenue related to six planes in fiscal year 2014 as compared to $3.5 million of
royalty revenue related to five planes in fiscal year 2015. We expect to recognize royalty revenue related to five planes during fiscal year 2016.
TS segment revenue change by product line for the twelve months ended September 30 was as follows:
(Dollar amounts in thousands)
Increase (Decrease)
Product
Services
Total
2015
2014
$
%
$
56,553 $
49,726 $
18,805
20,358
$
75,358 $
70,084 $
6,827
(1,553)
5,274
14 %
(8)%
8 %
The increase in TS segment revenues, for fiscal year 2015 compared to fiscal year 2014, was the result of increases in our US and UK divisions of $5.8
million and $1.7 million , respectively, partially offset by a decrease in our German division of $2.2 million . The increase in TS segment product revenues, for
fiscal year 2015 compared to fiscal year 2014, was the result of increases in our US and UK divisions of $6.4 million and $1.9 million , respectfully, partially offset
by a decline in Germany of $1.5 million .
Our revenues by geographic area based on the location to which the products were shipped or services rendered was as follows:
(Dollar amounts in thousands)
Americas
Europe
Asia
Totals
Gross Margins
For the Twelve Months Ended September 30,
Increase (Decrease)
2015
%
2014
%
$
%
$
$
58,433
27,848
3,025
89,306
66% $
31%
3%
100% $
53,561
28,396
2,662
84,619
63% $
34%
3%
100% $
4,872
(548)
363
4,687
9 %
(2)%
14 %
6 %
Our gross margin decreased by $1.6 million or (4)% of revenues to $19.2 million in fiscal year 2015 as compared to a gross margin of $20.8 million in fiscal
year 2014.
The following table summarizes gross margin changes by segment for fiscal year 2015 and 2014:
16
(Dollar amounts in thousands)
2015
2014
Decrease
GM$
GM%
GM$
GM%
GM$
GM%
HPP
TS
Total
$
$
7,949
11,238
19,187
57% $
15%
21% $
9,167
11,654
20,821
63% $
17%
25% $
(1,218)
(416)
(1,634)
(6)%
(2)%
(4)%
The impact of product mix within our HPP segment on gross margin for the twelve months ended September 30 was as follows:
(Dollar amounts in thousands)
2015
2014
Increase (Decrease)
GM$
GM%
GM$
GM%
GM$
GM%
Product
Services
Total
$
$
3,985
3,964
7,949
40% $
98%
57% $
3,911
5,256
9,167
43% $
98%
63% $
74
(1,292)
(1,218)
(3)%
— %
(6)%
The decrease in our HPP segment gross margins is primarily attributed to the impact of $4.5 million of royalty licensing revenue related to six planes at
approximately 100% gross margin in fiscal year 2014 as compared to $3.5 million of plane related royalties in fiscal year 2015 as well as a decrease in revenue for
replacement parts and repairs for the comparative period.
The impact of product mix within our TS segment on gross margin for the twelve months ended September 30 was as follows:
(Dollar amounts in thousands)
2015
2014
Increase (decrease)
GM$
GM%
GM$
GM%
GM$
GM%
Product
Services
Total
$
$
6,984
4,254
11,238
12% $
23%
15% $
6,215
5,439
11,654
12% $
27%
17% $
769
(1,185)
(416)
— %
(4)%
(2)%
For fiscal year 2015 compared to fiscal year 2014, the decrease in our TS segment gross margin of $0.4 million is primarily attributed to the decreases in gross
margin of $0.3 million and $0.2 million in our U.K. and German divisions , respectively, partially offset by a $0.1 million increase in our U.S.division. The $0.8
million increase in product gross margins is primarily attributed to increases of $0.3 million and $0.5 million in the U.K. and U.S. divisions, respectively. The $1.2
million decrease in service gross margins is primarily attributed to decreases of $0.4 million and $0.6 million in the U.S. and U.K. divisions, respectively. The U.K.
variance is attributed to the under utilization of engineering overhead and the recognition of cost over runs on certain fixed price contracts in the U.K. division, and
the decrease in U.S. division margin is attributed to lower service revenues.
Engineering and Development Expenses
The following table details our engineering and development expenses by operating segment for the fiscal years ended September 30, 2015 and 2014:
17
(Dollar amounts in thousands)
By Operating Segment:
HPP
TS
Total
For the Year ended September 30,
2015
% of
Total
2014
% of
Total
$ Increase
(Decrease)
% Increase
(Decrease)
$
$
2,772
54
2,826
98% $
2%
100% $
3,484
—
3,484
100% $
—%
100% $
(712)
54
(658)
(20)%
— %
(19)%
The decrease in engineering and development expenses in the HPP segment is attributed to the timing of expenditures and reductions in cost. The fiscal year
2015 expenses are primarily for Myricom engineering expenses incurred in connection with the development of new products, which includes the release of our
Myricom 10 Gigabyte Ethernet Adapters with DBL software on July 7, 2015, during the fourth quarter of our fiscal year.
Selling, General and Administrative
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the years ended September 30, 2015 and
2014:
(Dollar amounts in thousands)
By Operating Segment:
HPP
TS
Total
For the Year ended September 30.
2015
% of
Total
2014
% of
Total
$ Increase
(Decrease)
% Increase
(Decrease)
$
$
4,692
11,443
16,135
29% $
71%
100% $
4,793
11,323
16,116
30% $
70%
100% $
(101)
120
19
(2)%
1 %
— %
For fiscal year 2015 compared to fiscal year 2014, HPP segment SG&A spending decreased overall by $0.1 million, which reflected increases of $0.4
million for salaries and wages and $0.2 million for employee benefits that were offset by decreased spending on outside consultants of $0.3 million, lower bonus
expense of $0.3 million, and net other reductions of $0.1 million. For fiscal year 2015 compared to fiscal year 2014, TS segment SG&A spending increased by
$0.1 million as the result higher sales compensation expense in the US and UK.
18
Other Income/Expenses
The following table details our other income/expenses for the years ended September 30, 2015 and 2014:
(Dollar amounts in thousands)
Interest expense
Interest income
Foreign exchange loss
Other income, net
Total other expense, net
Income Taxes
For the Year ended September 30,
2015
2014
Increase (Decrease)
$
$
(84) $
9
(172)
37
(210) $
(85) $
11
(162)
8
(228) $
1
(2)
(10)
29
18
The Company recorded an income tax expense of approximately $0.2 million, which reflected an effective tax expense rate of 1414% for the year ended
September 30, 2015, compared to income tax expense of approximately $0.1 million for the year ended September 30, 2014, which reflected an effective tax rate
of 8%. The significant increase in the effective tax rate for the year ended September 30, 2015 was due to the fact that no tax benefit was recorded from the
substantial loss in the UK due to the fact that a full valuation allowance is maintained against the deferred tax assets as discussed below.
As of September 30, 2015, management assessed the positive and negative evidence in the U.S operations, and estimated we will have sufficient future
taxable income to utilize the existing deferred tax assets. Significant objective positive evidence included the cumulative profits that we realized over the most
recent years. This evidence enhances our ability to consider other subjective evidence such as our projections for future growth. Other factors we considered are the
likelihood for continued royalty income in future years, and our expectation that the TS segment will continue to be profitable in future years. On the basis of this
evaluation, as of September 30, 2015, we have concluded that our U.S. deferred tax asset is more likely than not to be realized. It should be noted however, that the
amount of the deferred tax asset realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are reduced, or if
objective negative evidence in the form of cumulative losses is present.
We continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any
indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that
actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may
change.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which decreased by approximately $5.2 million to $11.2 million as of September 30, 2015
from $16.4 million as of September 30, 2014 . At September 30, 2015 , cash equivalents totaled $0.5 million .
Significant uses of cash for the year ended September 30, 2015 included an increase in accounts receivable of approximately $8.2 million , payment of
dividends of approximately $1.6 million , a decrease in deferred revenue of approximately $0.8 million , purchases of property and equipment of approximately
$0.7 million , and unfavorable currency exchange fluctuation of approximately $0.6 million . Partially offsetting these uses of cash were an increase in accounts
payable and accrued expenses of approximately $4.5 million .
Cash held by our foreign subsidiaries located in Germany and the U.K. totaled approximately $3.3 million as of September 30, 2015 and $7.1 million as of
September 30, 2014 . 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 because repatriating it would result in unfavorable tax consequences. Consequently, it is not available for activities that would require it to be
repatriated to the U.S.
19
As of September 30, 2015 and September 30, 2014, the Company maintained a line of credit that allows for borrowings of up to $1.0 million. Availability
under the facility is reduced by outstanding borrowings thereunder. The interest rates on outstanding borrowings is London Inter-Bank Offer Rate (“LIBOR”) plus
2.5%, with a floor of 4% . Borrowings under the credit agreements are required to be repaid on demand by the lender in certain circumstances, upon termination of
the agreements, or may be prepaid by the Company without penalty. The Company did not borrow under the line of credit during the fiscal years ending September
30, 2015 and 2014.
As of September 30, 2015 and September 30, 2014, the Company also maintained an inventory line of credit that may be used by the TS business segment
in the U.S. to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. No interest accrues under the inventory
line of credit when advances are paid within terms, late payments are subject to an interest charge of Prime plus 5%. The credit agreements for the inventory line of
credit contain financial covenants which require the Company to maintain the following TS segment specific financial ratios: (1) a minimum current ratio of 1.2,
(2) tangible net worth of no less than $2.5 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0:1. As of September 30, 2015 and
September 30, 2014, Company borrowings under the inventory line of credit were $2.9 million and $2.1 million, respectively, and the Company was in compliance
with all covenants for the inventory line of credit as of September 30, 2015 and 2014.
For more information, please refer to Note 12 - Lines of Credit, in the Notes to our Consolidated Financial Statements contained in this annual report on
Form 10-K.
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.
20
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, goodwill and intangibles, income taxes, deferred compensation, revenue recognition, retirement
plans, restructuring costs 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.
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 allowance for doubtful accounts and net deferred tax asset valuation allowance;
inventory valuation; intangibles; and pension and retirement plans.
Revenue Recognition
We derive revenue from the sale of integrated hardware and software, professional services, maintenance contracts, other services, and third party service
contracts. Professional services generally include implementation, installation, and training services. Other services generally include revenue generated through
our royalty and extended warranty contracts. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has
occurred, the fee is fixed or determinable and collectability is reasonably assured. We enter into multiple element arrangements as well as standalone sales of
product, professional services, and other services.
We recognize revenue from standalone product sales upon transfer of title, which is typically upon shipment, provided all other revenue recognition criteria
have been met. Revenue generated from standalone professional services and extended warranty contracts is recognized as services are completed, provided all
other revenue recognition criteria have been met. In some instances professional service contracts include a customer acceptance provision, in which case revenue
is deferred until we have evidence of customer acceptance. We recognize revenue from usage based royalty contracts upon confirmation from the customer of
shipment of the system produced pursuant to the royalty agreement.
We recognize revenue from multiple element arrangements in accordance with ASC 605-25, Multiple Element Arrangements. We evaluate multiple element
arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each
element. ASC 605-25 establishes a hierarchy for determining the amount to allocate to each separate deliverable in an arrangement. We determine selling price
using vendor specific objective evidence (“VSOE”), if it exists; or, if VSOE does not exist, third party evidence (“TPE”) of fair value is applicable; otherwise, we
use the best estimate of selling price (“BESP”). The objective of BESP is to determine the price at which the Company would transact if the element was sold on a
standalone basis. Management’s determination of BESP involves several factors including budgeted profit margins, and cost to complete services.
We recognize revenue from third party service contracts as either gross sales or net sales in accordance ASC 605-45, Principal Agent Considerations, which
requires us to determine if the Company is acting as a principal party to the transaction or simply acting as an agent or broker. Under ASC 605-45, the assumption
of the risks and rewards under the arrangement are
considered indicators of principal parties to the arrangement. We record revenue as gross when it is a principal party to the arrangement and net of cost when we
are acting as a broker or agent. Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or
vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to revenue
resulting in net sales equal to the gross profit on the transaction.
The following policies are applicable to our major categories of segment revenue transactions:
HPP Segment Revenue
HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multi-computer and
Myricom product lines. Multi-computer product revenue is generally recognized when product is shipped, provided that all revenue recognition criteria are met.
Service revenue consists principally of other
21
services which comprise of warranty and royalty revenue. Revenue generated from extended warranty contracts is recognized as services are completed, provided
all other revenue recognition criteria have been met We recognize revenue from usage based royalty contracts upon confirmation from the customer of shipment of
the system produced pursuant to the royalty agreement.
Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products
functionality, and post contract maintenance and support. Revenue on multiple element arrangements is recognized in accordance with ASC 605-25. We evaluate
multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling
price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors, including, but not limited to,
internal costs and gross margin objectives. Accordingly revenue for post contract maintenance and support is recognized over the implied maintenance period of
three years, and revenue for product sales is recognized upon delivery assuming all other revenue recognition criteria have been met.
TS Segment Revenue
TS Segment revenue is derived from the sale of hardware, software, professional services, and third party service contracts. TS product revenue is generally
recognized when product is shipped, provided that all revenue recognition criteria are met. Service revenue consists of professional services which generally
include implementation, installation, and training services. Revenue generated from standalone professional services is recognized as services are completed,
provided all other revenue recognition criteria has been met. Our standard sales agreements generally do not include customer acceptance provisions. However, in
certain instances when arrangements include a customer acceptance provision or there is uncertainty about customer acceptance, revenue is deferred until we have
evidence of customer acceptance.
Revenue derived from the sale of products, which are comprised of both hardware and software, and professional services is recognized in accordance with
ASC 605-25. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based
upon the relative selling price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors,
including, but not limited to, internal costs and gross margin objectives. Accordingly revenue for professional services is recognized as services are completed, and
revenue for product sales is recognized upon delivery assuming all other revenue recognition criteria have been met.
We recognize revenue from certain third party service contracts, which are evaluated to determine whether such service revenue should be recorded as gross
sales or net sales in accordance ASC 605-45. We evaluate all third party service contracts to determine whether we act as a principal in the transaction and assume
the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the entire selling price is recorded in sales and
our cost to the third-party service provider or vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or
vendor is recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no costs of goods sold. We use the net sales
recognition method for the third party service contracts that we sell when we are not the primary obligor on the contract. We use the gross sales recognition for the
third party service contracts that we sell when we act as principal and are the primary obligor.
Product Warranty Accrual
Our product sales generally include a 90-day to three-year hardware warranty. At time of product shipment, we accrue for the estimated cost to repair or
replace potentially defective products. Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.
Engineering and Development Expenses
Engineering and development expenses include payroll, employee benefits, stock-based compensation and other headcount-related expenses associated with
product development. Engineering and development expenses also include third-party development and programming costs. We consider technological feasibility
for our software products to be reached upon the release of the software, accordingly, no internal software development costs have been capitalized.
Income Taxes
22
We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We also reduce
deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred
tax assets will not be realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets
and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering
all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that
these assets will not be realized.
In addition, we are required to recognize in the consolidated financial statements, those tax positions determined to be more-likely-than-not of being
sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be
sustained based solely on its technical merits, no benefits of the position are recognized.
In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of
jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the
provision for taxes that may become payable in the future.
I ntangible Assets
Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if events or circumstances indicate that the
asset may be impaired. We did not have intangible assets with indefinite lives other than goodwill at any time during the two years ended September 30, 2015 .
Intangible assets subject to amortization are amortized over their estimated useful lives, generally three to ten years, and are carried at cost, less accumulated
amortization. The remaining useful lives of intangible assets are evaluated on an annual basis. Intangible assets subject to amortization are also tested for
recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the fair value of an intangible asset
subject to amortization is determined to be less than its carrying value, then an impairment charge is recorded to write down that asset to its fair value.
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.
Pension and Retirement Plans
The funded status of pension and other post-retirement benefit plans is recognized prospectively on the balance sheet. Gains and losses, prior service costs
and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other
comprehensive income, net of tax, until they are amortized as a component of net periodic pension/post-retirement benefits expense. Additionally, plan assets and
obligations are measured as of our fiscal year-end balance sheet date (September 30).
We have defined benefit and defined contribution plans in the U.K., Germany and in the U.S. In the U.K. and Germany, the Company provides defined
benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees. The defined benefit plans in
both the U.K. and Germany are closed to newly hired employees and have been for the two years ended September 30, 2015 . In the U.S., the Company also
provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now
retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2015 . These
supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the
future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant. These whole life
insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the
23
defined benefit plans. In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-
retirement plans to certain officers. The Company also funds these supplemental plans' obligations through whole life insurance policies on the officers.
Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets, expected compensation
increases and applicable discount rates. Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisers and
concluded they were reasonable. A decrease in the expected return on pension assets would increase pension expense. Expected compensation increases are
estimated based on historical and expected increases in the future. Increases in estimated compensation increases would result in higher pension expense while
decreases would lower pension expense. Discount rates are selected based upon rates of return on high quality fixed income investments currently available and
expected to be available during the period to maturity of the pension benefit. A decrease in the discount rate would result in greater pension expense while an
increase in the discount rate would decrease pension expense.
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.
Inflation and Changing Prices
Management does not believe that inflation and changing prices had significant impact on sales, revenues or income (loss) during fiscal 2015 or 2014 . There
is no assurance that the Company's business will not be materially and adversely affected by inflation and changing prices in the future.
24
Item 8.
Financial Statements and Supplementary Data
The consolidated financial statements are included herein.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2015 and 2014
Consolidated Statements of Operations for the years ended September 30, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2015 and 2014
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2014
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
25
Page
32
33
34
35
36
37
38
Item 9A.
Controls and Procedures
Evaluation of Controls and Procedures
Disclosure Controls and Procedures. The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of
September 30, 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 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 its 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 September 30, 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 9A has been remediated by the changes we made in response to that material weakness.
Management's Report on Internal Control over Financial Reporting.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f)
under the Exchange Act, internal control over financial reporting is a process designed by or under the supervision of a company's principal executive and principal
financial officers and effected by a company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. It includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management
and the board of directors of a company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company's assets that could
have a material effect on its financial statements.
Management has assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2015 . In making its assessment of
internal control, management used the criteria described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission. As a result of its assessment, management has concluded that the Company's internal control over financial reporting was
not effective as of September 30, 2015 .
For the period ended September 30, 2015, management has 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 prevented or detected in a timely basis.
The material weakness is in connection with our controls over the revenue recognition process, specifically that revenue recognition criteria have 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, as we continued to make personnel changes and upgrade systems throughout fiscal year 2015.
26
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 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
improved accounting operations in our European divisions.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
This Annual Report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of September 30, 2015
was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the SEC that call for the Company to provide
only management's report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting.
During the quarter ended September 30, 2015 , there were no changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
We incorporate the information required by this item by reference to the sections captioned “Nominees for Election”, “Our Board of Directors”, “Our
Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our Schedule 14A Proxy Statement for our
2014 Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2015 .
Item 11.
Executive Compensation
We incorporate the information required by this item by reference to the sections captioned “Compensation of Executive Officers” and “Compensation of
Non-Employee Directors” in our Schedule 14A Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the
end of our fiscal year ended September 30, 2015 .
27
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans.
The equity compensation plans approved by our stockholders consist of the CSP, Inc.1997 Incentive Stock Option Plan, the 2003 Stock Incentive Plan, the
2007 Stock Incentive Plan, the 2014 Employee Stock Purchase Plan (the "ESPP") and the 2015 Stock Incentive Plan . In fiscal 2015 and 2014 , the Company
granted certain officers including its Chief Executive Officer and non-employee directors shares of non-vested common stock instead of stock options. The vesting
periods for the officers', the Chief Executive Officer's and the directors' non-vested stock awards are four years, three years and one year, respectively. The
following table sets forth information as of September 30, 2015 regarding the total number of securities outstanding under these equity compensation plans.
Plan Category
(a) (1)(2)
(b)
Number of securities to be
issued upon exercise of
outstanding stock options
and non-vested shares
issued
Weighted-average
exercise price of outstanding
stock options
(c)
Number of securities
remaining available for future
issuance under equity
compensation plans (excluding
securities reflected in column)
(a))(3)
Equity compensation plans approved by security holders
356,471 $
6.43
533,003
(1) Includes 301,345 non-vested shares issued.
(2) Does not include purchase rights under the ESPP, as the purchase price and number of shares to be purchased under the ESPP are not determined until the end
of the relevant purchase period.
(3) Includes 327,673 shares available for future issuance under the incentive stock and stock option plans and 205,330 under the ESPP.
We incorporate additional information required by this Item by reference to the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in our Schedule 14A Proxy Statement for our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our
fiscal year ended September 30, 2015 .
Item 13.
Certain Relationships and Related Transactions and Director Independence
We incorporate the information required by this item by reference to the section captioned “Corporate Governance” in our Schedule 14A Proxy Statement
for our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2015 .
Item 14.
Principal Accountant Fees and Services
We incorporate the information required by this item by reference to the section captioned “Fees for Professional Services” and “Pre-approval Policies and
Procedures” in our Schedule 14A Proxy Statement for our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our
fiscal year ended September 30, 2015 .
28
Item 15.
Exhibits and Financial Statement Schedules
(a) (1) Financial statements filed as part of this report:
Consolidated Balance Sheets as of September 30, 2015 and 2014
PART IV
Consolidated Statements of Operations for the years ended September 30, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2015 and 2014 .
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2014
Notes to Consolidated Financial Statements
(2) Financial statement schedules
All other financial statements and schedules not listed have been omitted since the required information is included in the consolidated financial statements
or the notes thereto included in Item 8, or is not applicable, material or required.
29
Incorporated by Reference
Form
Filing Date
10-K
10-K
10-K
10-K
December 26, 2007
December 20, 2012
November 22, 1996
December 29, 2008
DEF 14A
March 30, 2007
Exhibit
No.
3.1
3.1
10.3
10.2
B
10.1
10-K
10-K
December 24, 2013
10.11
December 22, 2009
10.11
DEF 14A
DEF 14A
January 6, 2014
January 5, 2015
A
A
Filed with
this Form
10-K
X
X
X
X
X
X
X
(3) Exhibits
Exhibit
No.
Description
3.1
3.2
10.1
10.2
10.9*
10.10*
10.11*
10.12*
10.15*
10.16*
10.20
10.21
21.1
23.1
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
Articles of Organization and amendments thereto
By-laws, as amended December 13, 2012
Form of Employee Invention and Non-Disclosure Agreement
CSPI Supplemental Retirement Income Plan
2007 Stock Incentive Plan
2014 Variable Compensation (Executive Bonus) and Base Programs
dated November 12, 2013
Death Benefit and Retirement Benefit Agreement between the Company
and Victor Dellovo dated September 13, 2013
Form of Change of Control Agreement with Gary W. Levine and
William E. Bent Jr. each dated January 11, 2008
2014 Employee Stock Purchase Plan
2015 Employee Stock Purchase Plan
2015 Lowell, MA Lease
2015 Deerfield Beach, FL Lease
Subsidiaries
Consent of RSM LLP, Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance
XBRL Taxonomy Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Labels
XBRL Taxonomy Extension Presentation
Management contract or compensatory plan.
30
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CSP INC.
By:
/s/ Victor Dellovo
Victor Dellovo
Chief Executive Officer and President
Date: December 24, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name
/S/ Victor Dellovo
Victor Dellovo
/s/ Gary W. Levine
Gary W. Levine
/s/ John M. Leydon
John M. Leydon
/s/ C. Shelton James
C. Shelton James
/s/ Raymond Charles Blackmon
Raymond Charles Blackmon
/s/ Myrilyn T. Smith
Marilyn T. Smith
Date
December 24, 2015
December 24, 2015
December 24, 2015
December 24, 2015
December 24, 2015
December 24, 2015
Title
Chief Executive Officer, President and
Director
Chief Financial Officer
(Principal Financial Officer)
Vice President of Finance
(Chief Accounting Officer)
Director
Director
Director
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
CSP Inc. and Subsidiaries
Lowell, MA
We have audited the accompanying consolidated balance sheets of CSP Inc. and Subsidiaries (the “Company”) as of September 30, 2015 and 2014, and the related
statements of operations, comprehensive income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September
30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting
principles.
RSM US LLP
Boston, Massachusetts
December 24, 2015
32
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
September 30,
2015
September 30,
2014
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $331 and $241
ASSETS
Unbilled accounts receivable
Inventories, net
Refundable income taxes
Deferred income taxes
Other current assets
Total current assets
Property, equipment and improvements, net
Other assets:
Intangibles, net
Deferred income taxes
Cash surrender value of life insurance
Other assets
Total other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Deferred revenue
Pension and retirement plans
Income taxes payable
Total current liabilities
Pension and retirement plans
Other long term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,688 and 3,619
shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
$
$
$
11,181
$
18,468
1,420
5,749
43
1,337
1,884
40,082
1,564
416
1,687
3,064
183
5,350
46,996
$
13,776
$
2,931
675
—
17,382
10,009
15
27,406
37
12,249
15,689
(8,385)
19,590
Total liabilities and shareholders’ equity
$
46,996
$
See accompanying notes to consolidated financial statements.
33
16,448
12,279
253
6,446
418
1,230
2,372
39,446
1,472
545
1,892
2,785
167
5,389
46,307
9,751
4,101
658
1
14,511
10,440
69
25,020
36
11,658
17,517
(7,924)
21,287
46,307
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)
For the year ended
September 30,
2015
September 30,
2014
Sales:
Product
Services
Total sales
Cost of sales:
Product
Services
Total cost of sales
Gross profit
Operating expenses:
Engineering and development
Selling, general and administrative
Total operating expenses
Bargain purchase gain
Operating income
Other (expense):
Foreign exchange loss
Other income (expense), net
Total other (expense), net
Income before income taxes
Income tax expense
Net income (loss)
Net income (loss) attributable to common stockholders
Net income (loss) per share – basic
Weighted average shares outstanding – basic
Net income (loss) per share – diluted
Weighted average shares outstanding – diluted
$
66,447
$
22,859
89,306
55,478
14,641
70,119
19,187
2,826
16,135
18,961
—
226
(172)
(38)
(210)
16
226
(210)
(210)
(0.06)
3,548
$
$
$
(0.06)
$
3,548
$
$
$
$
58,877
25,742
84,619
48,751
15,047
63,798
20,821
3,484
16,116
19,600
462
1,683
(162)
(66)
(228)
1,455
121
1,334
1,284
0.37
3,448
0.37
3,499
See accompanying notes to consolidated financial statements.
34
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
Net income (loss)
Other comprehensive income (loss):
Unrealized actuarial loss on minimum pension liability
Foreign currency translation gain (loss)
Other comprehensive loss
Total comprehensive loss
For the year ended
September 30,
2015
September 30,
2014
$
(210)
$
1,334
(131)
(330)
(461)
(671)
$
(1,720)
(339)
(2,059)
(725)
$
See accompanying notes to consolidated financial statements.
35
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Year Ended September 30, 2015:
(Amounts in thousands)
Balance as of September 30, 2013
Comprehensive income (loss):
Net income
Other comprehensive loss
Stock-based compensation
Tax benefit from exercise of stock options
Restricted stock issuance
Issuance of shares under employee stock purchase plan
Exercise of stock options
Cash dividends on common stock ($0.43 per share)
Balance as of September 30, 2014
Comprehensive loss:
Net loss
Other comprehensive loss
Stock-based compensation
Restricted stock issuance
Issuance of shares under employee stock purchase plan
Exercise of stock options
Cash dividends on common stock ($0.44 per share)
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
other
comprehensive
loss
Total
Shareholders’
Equity
3,496 $
35 $
11,137 $
17,728 $
(5,865)
$
23,035
—
—
—
—
106
14
3
—
3,619
—
—
—
36
31
2
—
—
—
—
—
1
—
—
—
36
—
—
—
1
—
—
—
—
—
359
47
—
99
16
—
11,658
—
—
375
—
206
10
—
1,334
—
—
—
—
—
—
(1,545)
17,517
(210)
—
—
—
—
—
(1,618)
—
(2,059)
—
—
—
—
—
—
(7,924)
—
(461)
—
—
—
—
—
1,334
(2,059)
359
47
1
99
16
(1,545)
21,287
(210)
(461)
375
1
206
10
(1,618)
19,590
Balance as of September 30, 2015
3,688 $
37 $
12,249 $
15,689 $
(8,385)
$
See accompanying notes to consolidated financial statements.
36
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash used in operating activities:
Bargain purchase gain
Depreciation and amortization
Amortization of intangibles
Loss on disposal of fixed assets, net
Foreign exchange loss
Non-cash changes in accounts receivable
Non-cash changes in inventory
Stock-based compensation expense on stock options and restricted stock awards
Deferred income taxes
Increase in cash surrender value of life insurance
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) decrease in inventories
Decrease in refundable income taxes
(Increase) decrease in other assets
Increase (decrease) in accounts payable and accrued expenses
Increase (decrease) in deferred revenue
Increase (decrease) in pension and retirement plans liability
Increase (decrease) in income taxes payable
Decrease in other long term liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Life insurance premiums paid
Proceeds from the sale of fixed assets
Cash paid to acquire business
Purchases of property, equipment and improvements
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Tax benefit from exercise of stock options
Proceeds from issuance of shares under equity compensation plans
Net cash used in financing activities
Effects of exchange rate on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplementary cash flow information:
Cash paid for income taxes
Cash paid for interest
For the year ended
September 30,
2015
September 30,
2014
$
(210)
$
1,334
—
(462)
516
130
54
172
96
560
375
2
(86)
(8,226)
78
356
328
4,461
(812)
(83)
4
(55)
(2,340)
(193)
—
—
(724)
(917)
(1,618)
—
216
(1,402)
(608)
(5,267)
16,448
11,181
$
15
85
$
$
510
124
5
162
1
407
361
(98)
(135)
647
(1,038)
194
(351)
(656)
513
252
(311)
(336)
1,123
(170)
6
(500)
(590)
(1,254)
(1,545)
47
114
(1,384)
(656)
(2,171)
18,619
16,448
201
85
$
$
$
See accompanying notes to consolidated financial statements.
37
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2014
Organization and Business
CSP Inc. (“CSPI” or “the Company” or “we” or “our”) was founded in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of
commercial and defense customers worldwide, CSPI and its subsidiaries develop and market IT integration solutions and high-performance cluster computer
systems. The Company operates in two segments, its HPP segment and its TS segment.
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have
been eliminated. Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the
reported results of operations.
Foreign Currency Translation
The U.S. Dollar is the reporting currency for all periods presented. The financial information for entities outside the United States is measured using the local
currency as the functional currency. Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at the exchange rates in effect at the
balance sheet date. Revenue and expenses are translated at average rates in effect during the period. The resulting translation adjustment is reflected as
accumulated other comprehensive income (loss), a separate component of shareholders' equity on the consolidated balance sheets. The translation adjustment for
intercompany foreign currency loans that are of a long-term-investment nature is also reflected as accumulated other comprehensive income (loss). Currency
transaction gains and losses are recorded as other income (expense) in the statements of operations.
Cash Equivalents
For purposes of the consolidated statements of cash flows, highly liquid investments with original maturities of three months or less at the time of acquisition
are considered cash equivalents.
Research and Development Expense
For the years ended September 30, 2015 and 2014 , our expenses for research and development were approximately $2.8 million and $3.5 million ,
respectively. Expenditures for research and development are expensed as they are incurred.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Management assesses the recoverability of the long-lived assets (other than goodwill) by
comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The amount of
impairment, if any, is calculated based on the excess of the carrying amount over the fair value of those assets. Intangible assets that are not subject to amortization
are also required to be tested annually, or more frequently if events or circumstances indicate that the asset may be impaired. We did not have intangible assets
with indefinite lives at any time during the two years ended September 30, 2015 . Intangible assets subject to amortization are amortized on a straight-line basis
over their estimated useful lives, generally three to ten years, and are carried at cost, less accumulated amortization. The remaining useful lives of intangible assets
are evaluated on an annual basis. Intangible assets subject to amortization are also tested for recoverability whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. If the fair value of an intangible asset subject to amortization is determined to be less than its carrying value,
then an impairment charge is recorded to write down that asset to its fair value.
38
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.
Property, Equipment and Improvements
The components of property, equipment and improvements are stated at cost. The Company provides for depreciation by use of the straight-line method over
the estimated useful lives of the related assets ( three to seven years). Leasehold improvements are amortized by use of the straight-line method over the lesser of
the estimated useful life of the asset or the lease term. Repairs and maintenance costs are expensed as incurred. Property, equipment and improvements are tested
for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If the fair value of property, equipment
and improvements is determined to be less than their carrying value, then an impairment charge is recorded to write down that asset to its fair value.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at amounts that have been billed to customers less an allowance for doubtful accounts. Allowances for doubtful accounts
are recorded for the estimated losses resulting from the inability of our customers to make required payments. The estimates for the allowance for doubtful
accounts are based on the length of time the receivables are past due, current business environment and our historical experience. If the financial condition of our
customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. Accounts receivable are charged
off against the reserve when management has determined they are uncollectible.
Pension and Retirement Plans
The funded status of pension and other postretirement benefit plans is recognized on the balance sheet. Gains and losses, prior service costs and credits and
any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive income, net
of tax, until they are amortized as a component of net periodic pension/postretirement benefits expense. Additionally, plan assets and obligations are measured as
of our fiscal year-end balance sheet date (September 30).
We have defined benefit and defined contribution plans in the United Kingdom (the “U.K.”), Germany and in the U.S. In the U.K. and Germany, the
Company provides defined benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees.
The defined benefit plans in both the U.K. and Germany are closed to newly hired employees and have been for the two years ended September 30, 2015 . In the
U.S., the Company also provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former
employees who are now retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended
September 30, 2015 . These supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid
under these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the
participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of
the defined benefit plans. In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental
post-retirement plans to certain officers. The Company also funds these supplemental plans' obligations through whole life insurance policies on the officers.
Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets, expected compensation
increases and applicable discount rates. Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisor and
concluded they were reasonable. A decrease in the expected return on pension assets would increase pension expense. Expected compensation increases are
estimated based on historical and expected increases in the future. Increases in estimated compensation increases would result in higher pension expense while
decreases would lower pension expense. Discount rates are selected based upon rates of return on high quality fixed income investments currently available and
expected to be available during the period to maturity of the pension benefit. A decrease in the discount rate would result in greater pension expense while an
increase in the discount rate would decrease pension expense.
39
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.
Revenue Recognition
We derive revenue from the sale of integrated hardware and software, professional services, maintenance contracts, other services, and third party service
contracts. Professional services generally include implementation, installation, and training services. Other services generally include revenue generated through
our royalty and extended warranty contracts. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has
occurred, the fee is fixed or determinable and collectability is reasonably assured. We enter into multiple element arrangements as well as standalone sales of
product, professional services, and other services.
We recognize revenue from standalone product sales upon transfer of title, which is typically upon shipment, provided all other revenue recognition criteria
have been met. Revenue generated from standalone professional services and extended warranty contracts is recognized as services are completed, provided all
other revenue recognition criteria have been met. In some instances professional service contracts include a customer acceptance provision, in which case revenue
is deferred until we have evidence of customer acceptance. We recognize revenue from usage based royalty contracts upon confirmation from the customer of
shipment of the system produced pursuant to the royalty agreement.
We recognize revenue from multiple element arrangements in accordance with ASC 605-25, Multiple Element Arrangements. We evaluate multiple element
arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each
element. ASC 605-25 establishes a hierarchy for determining the amount to allocate to each separate deliverable in an arrangement. We determine selling price
using vendor specific objective evidence (“VSOE”), if it exists; or, if VSOE does not exist, third party evidence (“TPE”) of fair value if applicable; otherwise, we
use the best estimate of selling price (“BESP”). The objective of BESP is to determine the price at which the Company would transact if the element was sold on a
standalone basis. Management’s determination of BESP involves several factors including budgeted profit margins, and cost to complete services.
We recognize revenue from third party service contracts as either gross sales or net sales in accordance ASC 605-45, Principal Agent Considerations, which
requires us to determine if the Company is acting as a principal party to the transaction or simply acting as an agent or broker. Under ASC 605-45, the assumption
of the risks and rewards under the arrangement are
considered indicators of principal parties to the arrangement. We record revenue as gross when it is a principal party to the arrangement and net of cost when we
are acting as a broker or agent. Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or
vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to revenue
resulting in net sales equal to the gross profit on the transaction.
The following policies are applicable to our major categories of segment revenue transactions:
HPP Segment Revenue
HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multi-computer and
Myricom product lines. Multi-computer product revenue is generally recognized when product is shipped, provided that all revenue recognition criteria are met.
Service revenue consists principally of other services which comprise of warranty and royalty revenue. Revenue generated from extended warranty contracts is
recognized as services are completed, provided all other revenue recognition criteria have been met We recognize revenue from usage based royalty contracts
upon confirmation from the customer of shipment of the system produced pursuant to the royalty agreement.
Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products
functionality, and post contract maintenance and support. Revenue on multiple element arrangements is recognized in accordance with ASC 605-25. We evaluate
multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling
price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors, including, but not limited to,
internal costs and gross margin objectives. Accordingly revenue for post contract maintenance and support is recognized over the implied maintenance period of
three years, and revenue for product sales is recognized upon delivery
40
assuming all other revenue recognition criteria have been met.
TS Segment Revenue
TS Segment revenue is derived from the sale of hardware, software, professional services, and third party service contracts. TS product revenue is generally
recognized when product is shipped, provided that all revenue recognition criteria are met. Service revenue consists of professional services which generally
include implementation, installation, and training services. Revenue generated from standalone professional services is recognized as services are completed,
provided all other revenue recognition criteria has been met. Our standard sales agreements generally do not include customer acceptance provisions. However, in
certain instances when arrangements include a customer acceptance provision or there is uncertainty about customer acceptance, revenue is deferred until we have
evidence of customer acceptance.
Revenue derived from the sale of products, which are comprised of both hardware and software, and professional services is recognized in accordance with
ASC 605-25. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based
upon the relative selling price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors,
including, but not limited to, internal costs and gross margin objectives. Accordingly revenue for professional services is recognized as services are completed, and
revenue for product sales is recognized upon delivery assuming all other revenue recognition criteria have been met.
We recognize revenue from certain third party service contracts, which are evaluated to determine whether such service revenue should be recorded as gross
sales or net sales in accordance ASC 605-45. We evaluate all third party service contracts to determine whether we act as a principal in the transaction and assume
the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the entire selling price is recorded in sales and
our cost to the third-party service provider or vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or
vendor is recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no costs of goods sold. We use the net sales
recognition method for the third party service contracts that we sell when we are not the primary obligor on the contract. We use the gross sales recognition for the
third party service contracts that we sell when we act as principal and are the primary obligor.
Product Warranty Accrual
Our product sales generally include a 90 -day to three -year hardware warranty. At time of product shipment, we accrue for the estimated cost to repair or
replace potentially defective products. Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.
Engineering and Development Expenses
Engineering and development expenses include payroll, employee benefits, stock-based compensation and other headcount-related expenses associated with
product development. Engineering and development expenses also include third-party development and programming costs. We consider technological feasibility
for our software products to be reached upon the release of the software, accordingly, no internal software development costs have been capitalized.
Income Taxes
We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We also reduce
deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred
tax assets will not be realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets
and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering
all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that
these assets will not be realized.
In addition, we are required to recognize in the consolidated financial statements, those tax positions determined to be more-likely-than-not of being
sustained upon examination, based on the technical merits of the positions as of the reporting
41
date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized.
In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of
jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the
provision for taxes that may become payable in the future.
Earnings per Share of Common Stock
Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net income 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 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.
Basic and diluted earnings per share computations for the Company's reported net income attributable to common stockholders are as follows:
Net income (loss)
Less: Net income attributable to nonvested common stock
Net income (loss) attributable to common stockholders
Weighted average total shares outstanding - basic
Less: weighted average non-vested shares outstanding
Weighted average number of common shares outstanding - basic
Potential common shares from non-vested stock awards and the assumed exercise of stock options
Weighted average common shares outstanding - diluted
Net income (loss) per share - basic
Net income (loss) per share - diluted
For the year ended
September 30, 2015
September 30, 2014
(Amounts in thousands except per share data)
$
$
$
$
(210) $
—
(210) $
3,548
—
3,548
—
3,548
(0.06) $
(0.06) $
1,334
50
1,284
3,582
134
3,448
51
3,499
0.37
0.37
All anti-dilutive securities, including stock options, are excluded from the diluted income per share computation. For the year ended September 30, 2015 , 26
thousand stock options were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive. For the fiscal year
ended September 30, 2014 , approximately 51 thousand stock options were excluded from the diluted income per share calculation because their inclusion would
have been anti-dilutive.
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. Actual results may differ from those estimates under different
assumptions or conditions.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payment awards made to employees and directors including stock options and
nonvested shares of restricted common stock based on estimated fair values of stock-based payment awards on the date of grant. The Company uses the Black-
Scholes option-pricing model to calculate the fair value of stock option grants. The fair value of nonvested restricted share awards is equal to the quoted market
price of our common stock as quoted on the Nasdaq Global Market on the date of grant. The value of the portion of the award that is ultimately
42
expected to vest is recognized as expense over the requisite service periods in the Company's Consolidated Statements of Operations.
Because stock-based compensation expense recognized in the Consolidated Statements of Operations for the fiscal years ended September 30, 2015 and
2014 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures and will be revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Stock-based compensation expense recognized for the fiscal years ended September 30, 2015 and 2014 consisted of stock-based compensation expense
related to options and nonvested restricted stock granted pursuant to the Company's stock incentive and employee stock purchase plans of approximately $0.4
million and $0.4 million , respectively.
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial institutions in the US, Germany and in the UK. Deposits held with banks may exceed the
amount of insurance on such deposits. Generally, these deposits may be redeemed upon demand. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Subsequent Events
On September 8, 2015, the Company executed a lease for 13,515 square feet of space at 175 Cabot Street in Lowell Massachusetts. The future annual rent
payment obligations under the terms of this five year and three month lease are $943,000 , which commence as of the December 1, 2015 effective date of the lease.
The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that
existed at the date of the statement of financial position, including the estimates inherent in the process of preparing financial statements. The Company has
evaluated subsequent events through the date of this filing.
New 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.
43
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.
2. Acquired Business
On November 4, 2013 the Company acquired substantially all of the assets of Myricom, Inc. Myricom has been integrated into the High Performance
Products and Solutions business segment. Prior to our acquisition, Myricom was a manufacturer of high performance interconnect computing devices and
software. The Company acquired Myricom in order to obtain (i) Myricom’s interconnect technology, which is critical to our latest MultiComputer products and
(ii) a strong base of new customers in commercial growth markets. The Company also retained key Myricom technical personnel. Myricom was a key supplier to
CSPI’s MultiComputer Division. Its interconnect technology is an important component of the latest generation MultiComputer products that we currently supply
to our customers.
Although Myricom was an established business prior to our acquisition, it had previously sold off a significant portion of its business and was faced with the
likelihood of having to shut down operations if it could not find a buyer to purchase its remaining assets. This was because the revenue that Myricom was able to
generate from these remaining assets was not sufficient to support its cost structure so as to enable Myricom to operate at a profit. These factors contributed to a
purchase price that resulted in the recognition of a bargain purchase gain. The Company paid total cash consideration of approximately $0.5 million to acquire
substantially all of the assets of Myricom and incurred approximately $0.1 million for the assumption of certain other liabilities. The purchase of Myricom
resulted in the recognition of a bargain purchase gain of approximately $0.5 million . The bargain purchase gain is presented as a component of operating income,
net of the federal and state tax effect.
The Myricom inventory was valued at fair value in connection with the acquisition and for the the years ended, September 30, 2015, and 2014, and approximately
$0.1 million and $0.2 million , respectively, of the stepped up basis in inventory was amortized through cost of sales.
The purchase price was allocated as follows:
Inventory
Property & equipment
Intangibles
Gross assets acquired
Product warranty liability assumed
Net assets acquired
Less: asset purchase price
Bargain purchase gain before tax
Deferred tax on bargain purchase gain
Bargain purchase gain, net of tax effect
(Amounts in Thousands)
$
$
1,030
17
260
1,307
(93)
1,214
500
714
(252)
462
The results of operations of Myricom for the for the year ended September 30, 2015 and the eleven month period beginning on November 4, 2013 and ending
on September 30, 2014 are included in the Company’s consolidated statements of operations for the years ended Septembr 30, 2015 and 2014, respectively.
44
3. Inventories
Inventories consist of the following:
Raw materials
Work-in-process
Finished goods
Total
September 30, 2015 September 30, 2014
(Amounts in thousands)
$
$
1,788 $
387
3,574
5,749 $
2,377
229
3,840
6,446
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not been met, of approximately $0.1 million and
$0.4 million as of September 30, 2015 and September 30, 2014 , respectively.
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.1 million and $4.7 million as of September 30,
2015 and September 30, 2014 , respectively.
4. Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as follows:
Balance as of September 30, 2013
Change in Period
Tax effect of change in period
Balance as of September 30, 2014
Change in Period
Tax effect of change in period
Balance as of September 30, 2015
Effect of Foreign
Currency
Translation
Minimum Pension
Liability
Accumulated Other
Comprehensive Loss
(Amounts in thousands)
$
$
$
(2,156) $
(339)
—
(2,495) $
(330)
—
(3,709) $
(2,164)
444
(5,429) $
(68)
(63)
(2,825) $
(5,560) $
(5,865)
(2,503)
444
(7,924)
(398)
(63)
(8,385)
The changes in the minimum pension liability are net of amortization of net gain of $140 thousand in 2015 and net gain of $58 thousand in 2014 included in
net periodic pension cost.
45
5.
Income Taxes
The components of income (loss) before income tax and income tax expense (benefit) are comprised of the following:
Income (loss) before income tax:
U.S.
Foreign
Income tax expense (benefit):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
For the Years Ended September 30,
2015
2014
(Amounts in thousands)
$
$
$
576 $
(560)
16 $
(4) $
24
152
172
(36)
67
23
54
$
226 $
1,460
(5)
1,455
(135)
14
37
(84)
159
16
30
205
121
As of September 30, 2015 , management assessed the positive and negative evidence in the U.S operations, and estimated we will have sufficient future
taxable income to utilize the existing deferred tax assets. Significant objective positive evidence included the cumulative profits that we realized over the most
recent years. This evidence enhances our ability to consider other subjective evidence such as our projections for future growth. Other factors we considered are the
likelihood for continued royalty income in future years, and our expectation that the TS segment will continue to be profitable in future years. On the basis of this
evaluation, as of September 30, 2015, we have concluded that our U.S. deferred tax asset is more likely than not to be realized. It should be noted however, that the
amount of the deferred tax asset realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are reduced, or if
objective negative evidence in the form of cumulative losses is present.
The recording and ultimate reversal of valuation allowances for our deferred tax asset requires significant judgment associated with past and projected
performance. In assessing the realizability of deferred tax assets, we consider our taxable future earnings and the expected timing of the reversal of temporary
differences. We recorded a valuation allowance which reduced the gross deferred tax asset to an amount that we believed was more likely than not to be realized
because of the cumulative losses incurred in the U.K. in recent years represented sufficient negative evidence to record a valuation allowance against certain
deferred tax assets.
We continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any
indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that
actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may
change.
46
Reconciliation of “expected” income tax expense (benefit) to “actual” income tax expense (benefit) is as follows:
Computed “expected” tax expense
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit
Foreign operations
Permanent differences
Stock-based compensation
Foreign net operating loss
Uncertain tax liability adjustment
Research & development credit
Other items
Income tax expense
For the Years Ended September 30,
2015
2014
(Dollar amounts in thousands)
$
5
34.0 % $
338
34.0 %
79
359
14
1
—
(54)
(91)
(87)
226
$
492.8 %
2,243.8 %
89.3 %
4.3 %
— %
(337.5)%
(568.8)%
(543.8)%
1,414.1 % $
25
99
61
(1)
(16)
(336)
(27)
(22)
121
2.5 %
10.0 %
6.1 %
(0.1)%
(1.6)%
(33.9)%
(2.7)%
(2.2)%
12.1 %
For the years ended September 30, 2015 and 2014 , temporary differences, which give rise to deferred tax assets (liabilities), are as follows:
Deferred tax assets:
Pension
Intangibles
Other reserves and accruals
Inventory reserves and other
State credits, net of federal benefit
Federal and state net operating loss carryforwards
Foreign net operating loss carryforwards
Foreign tax credits
Depreciation and amortization
Gross deferred tax assets
Less: valuation allowance
Realizable deferred tax asset
Gross deferred tax liabilities
Net deferred tax assets
September 30, 2015 September 30, 2014
(Amounts in thousands)
$
2,023 $
2,084
409
618
724
253
71
2,093
7
(126)
6,072
(3,048)
3,024
—
$
3,024 $
517
547
632
33
18
1,940
7
(22)
5,756
(2,634)
3,122
—
3,122
The deferred tax valuation allowance increased by approximately $414 thousand , as shown above. In assessing the realizability of deferred tax assets, the
Company considers its taxable future earnings and the expected timing of the reversal of temporary differences. Accordingly, the Company has recorded a
valuation allowance which reduces the gross deferred tax asset to an amount which management believes will more likely than not be realized. The valuation
allowance was determined by assessing both positive and negative evidence whether it is more likely than not that deferred tax assets are realizable. Such
assessment is done on a jurisdiction-by-jurisdiction basis. The Company's inability to project future profitability beyond fiscal year 2015 and the cumulative losses
incurred in recent years in the U.K. represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets.
As of September 30, 2015 and 2014 , the Company had U.S. net operating loss carryforwards for state tax purposes of approximately $0.4 million and $0.5
million , respectively, which are available to offset future taxable income through 2031.
47
As of September 30, 2015, the Company had state research and development tax credit carry-forwards in the amount of $327 that expire in years 2024
through 2028. The Company also had other state tax credit carry-forwards of $58k available to reduce future state tax expense of which $56k has unlimited
carryover status and $2k will expire in 2017.
As of September 30, 2015 the Company concluded that a net increase of $215k of the valuation allowance was appropriate. As part of the Company’s
analysis, the Company evaluated, among other factors, its recent history of generating taxable income in state jurisdictions and its near-term forecasts of future
taxable income. The net increase in the Company’s valuation allowance of $215k is to reserve for state tax credit carry-forwards that the Company believes will
expire unused.
As of September 30, 2015 , the Company had U.K. net operating loss carryforwards of approximately $10.5 million that have an indefinite life with no
expiration.
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $2.5 million and $3.2 million at September 30, 2015 and 2014 ,
respectively. The Company's policy is that its undistributed foreign earnings are indefinitely reinvested and, accordingly, no U.S. federal and state deferred tax
liabilities have been recorded.
In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of
jurisdictions. The Company records liabilities for estimated tax obligations in the U.S. and other tax jurisdictions. These estimated tax liabilities include the
provision for taxes that may become payable in the future.
As of September 30, 2015 , the total amount of uncertain tax liabilities was $0.1 million , all of which would affect our effective tax rate if recognized. We
recognize interest and potential penalties accrued related to unrecognized tax benefits in our provision for income taxes.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Balance, beginning of year
Increases in tax positions in the current year
Settlements
Lapse in statute of limitations
Accrued penalties and interest
Balance, end of period
For the Year Ended September
30, 2015
For the Year Ended September
30, 2014
$
$
(Amounts in thousands)
249
$
—
(72)
—
18
195
$
589
—
(362)
—
22
249
We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions. The Company has reviewed the tax positions taken on
returns filed domestically and in its foreign jurisdictions for all open years, generally fiscal 2012 through 2015, and believes that tax adjustments in any audited
year will not be material, except for the uncertain tax position described above.
6. Property, Equipment and Improvements, Net
Property, equipment and improvements, net consist of the following:
Leasehold improvements
Equipment
Automobiles
Less accumulated depreciation and amortization
Property, equipment and improvements, net
48
September 30, 2015
September 30, 2014
$
$
(Amounts in thousands)
440 $
8,170
74
8,684
(7,120)
1,564 $
399
7,933
66
8,398
(6,926)
1,472
The Company uses the straight-line method over the estimated useful lives of the assets to record depreciation expense. Depreciation expense was $516
thousand and $510 thousand for the years ended September 30, 2015 and 2014 , respectively.
49
7. Acquired Intangible Assets
As of September 30, 2015 and 2014 , intangible assets are as follows:
September 30, 2015
September 30, 2014
Weighted Average
Remaining
Amortization
Period
Gross
Accumulated
Amortization
Net
Weighted Average
Remaining
Amortization
Period
Gross
Accumulated
Amortization
Net
4 years $
910 $
591 $
(Amounts in thousands)
319
5 years $
910 $
500 $
410
0 years
1 year
3 years
93
30 $
140 $
93
19 $
54 $
—
11
86
0 years
2 years
4 years
93
30
140
93
9
26
$ 1,173 $
757 $
416
$
1,173 $
628 $
Customer list
Non-Compete
agreements
Developed Technology
Trade Name
Total
Amortization expense on these intangible assets was $130 thousand and $124 thousand for fiscal 2015 and 2014 , respectively.
Annual amortization expense related to intangible assets for each of the following successive fiscal years is as follows:
Fiscal year ending September 30:
(Amounts in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable
Commissions
Compensation and fringe benefits
Professional fees and shareholders' reporting costs
Taxes, other than income
Warranty
Other
9. Stock Based Incentive Compensation
$
September 30,
2015
2014
(Amounts in thousands)
10,559 $
248
1,426
499
25
125
894
13,776 $
$
$
In 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), and authorized 199,650 shares of common stock to be reserved for issuance
pursuant to the 1997 Plan. The 1997 plan expired in 2007. Because the 1997 Plan has expired, no further awards will be issued under this plan. In 2003, the
Company adopted the 2003 Stock Incentive Plan (the “2003 Plan”) and authorized 200,000 shares of common stock to be reserved for issuance pursuant to the
2003 Plan. The 2003 plan expired in 2014. Because the 2003 Plan has expired, no further awards will be issued under this plan. In 2007, the Company adopted the
2007 Stock Incentive Plan (the “2007 Plan”) and authorized 250,000 shares of common stock to be reserved for
50
—
21
114
545
129
120
119
11
9
28
416
6,748
118
1,594
485
217
213
376
9,751
issuance pursuant to the 2007 Plan. As of September 30, 2015 , there were 27,673 shares available to be granted under the 2007 Plan. In 2015, the Company
adopted the 2015 Stock Incentive Plan (the “2015 Plan”) and authorized 300,000 shares of common stock to be reserved for issuance pursuant to the 2015 Plan. As
of September 30, 2015 , there were 300,000 shares available to be granted under the 2015 Plan. Under all of the stock incentive plans, both incentive stock options
and non-qualified stock options may be granted to officers, key employees and other persons providing services to the Company. The 2003 Plan and 2007 Plan
also provide for awards of nonvested shares of common stock. All of the Company's stock incentive plans have a ten year life. The total number of available shares
under all plans for future awards was 327,673 as of September 30, 2015 .
Awards issued under any of the stock option plans are not affected by termination of the plan. The Company issues stock options at their fair market value on
the date of grant. Vesting of stock options granted pursuant to the Company's stock incentive plans is determined by the Company's compensation committee.
Generally, options granted to employees vest over four years and expire ten years from the date of grant. Options granted to non-employee directors have
historically included cliff vesting after six months from the date of grant and expire three years from the date of grant. In fiscal years 2013 through 2015 , the
Company granted certain officers including its Chief Executive Officer and non-employee directors, and key employees shares of nonvested common stock instead
of stock options. The vesting periods for the officers', the Chief Executive Officer's and the directors' nonvested stock awards are four years, three years and one
year, respectively. The vesting period for the key employees' awards is four years.
We measure and recognize compensation expense for all stock-based payment awards made to employees and directors including employee stock options
and awards of nonvested stock based on estimated fair values, as described in Note 1. Stock-based compensation expense incurred and recognized for the years
ended September 30, 2015 and 2014 related to stock options and nonvested stock granted to employees and non-employee directors under the Company's stock
incentive and employee stock purchase plans totaled approximately $375 thousand and $361 thousand , respectively. The classification of the cost of share-based
compensation, in the statements of operations, is consistent with the nature of the services being rendered in exchange for the share based payment. The following
table summarizes stock-based compensation expense in the Company's consolidated statements of operations:
Cost of sales
Engineering and development
Selling, general and administrative
Total
Year ended
September 30, 2015 September 30, 2014
(Amounts in thousands)
$
$
2 $
22
351
375 $
—
25
336
361
For the year ended September 30, 2015 , the Company granted 11,000 nonvested shares to certain key employees, 30,500 nonvested shares to certain officers
including 12,000 shares granted to the Chief Executive Officer and 16,000 nonvested shares to its non-employee directors. For the year ended September 30, 2014
, the Company granted 54,250 nonvested shares to certain key employees, 37,500 nonvested shares to certain officers including 22,500 to its Chief Executive
Officer and 16,000 nonvested shares to its non-employee directors.
The Company measures the fair value of nonvested stock awards based upon the market price of its common stock as of the date of grant. The Company
used the Black-Scholes option-pricing model to value stock options. The Black-Scholes model requires the use of a number of assumptions including volatility of
the Company's stock price, the weighted average risk-free interest rate and the weighted average expected life of the options, at the time of grant. The expected
dividend yield is equal to the divided per share declared, divided by the closing share price on the date the options were granted. All equity compensation awards
granted for the years ended September 30, 2015 and September 30, 2014 were non-vested stock awards.
As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, expense for
grants beginning upon adoption on October 1, 2005 has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rates for the years ended September 30, 2015 and 2014 were based
on actual forfeitures.
No cash was used to settle equity instruments granted under share-base payment arrangements in any of the years in the two-year period ended
September 30, 2015 .
51
The following tables provide summary data of stock option award activity:
Outstanding at September 30, 2013
Granted
Expired
Forfeited
Exercised
Outstanding at September 30, 2014
Granted
Expired
Forfeited
Exercised
Outstanding at September 30, 2015
Exercisable at September 30, 2015
Vested and expected to vest at September 30, 2015
Weighted
average
exercise
price
Number
of Shares
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in thousands)
107,676 $
—
(12,500) $
—
(3,050)
92,126 $
—
(35,125) $
—
(1,875)
55,126 $
54,813 $
55,126 $
7.56
—
7.48
—
5.02
7.66
—
9.72
—
5.26
6.43
6.45
6.43
—
—
—
—
—
—
—
—
—
—
1.89 Years
1.86 Years
1.89 Years
$
$
$
—
—
—
—
—
—
—
—
—
—
32
32
32
There were no stock options granted in the years ended September 30, 2015 and 2014 . The aggregate intrinsic value of stock options exercised during the
years ended September 30, 2015 and 2014 was $3 thousand and $9 thousand , respectively.
52
The following table provides summary data of nonvested stock award activity:
Number of
nonvested
shares
Weighted
Average
grant date
Fair
Value
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in thousands)
Nonvested shares outstanding at September 30, 2013
73,500 $
5.21
2.18 years $
Activity in 2014:
Granted
Vested
Forfeited
Nonvested shares outstanding at September 30, 2014
Activity in 2015:
Granted
Vested
Forfeited
Nonvested shares outstanding at September 30, 2015
Vested at September 30, 2015
Vested and expected to vest at September 30, 2015
107,750 $
(31,375) $
(500)
149,375 $
57,500 $
(58,296) $
(18,122)
130,457 $
170,888 $
301,345 $
7.72
5.64
7.67
6.92
5.05
6.82
7.38
6.08
5.11
5.53
520
—
—
—
—
—
—
2.45 Years
$
1,191
—
—
—
2.12 Years
0.39 Years
1.14 Years
$
$
$
—
—
—
714
935
1,648
As of September 30, 2015 there was $523 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements
(including stock option and nonvested stock awards) granted under the company's stock incentive plans. This cost is expected to be expensed over a weighted
average period of approximately 2.27 years . The total fair value of shares vested during the years ended September 30, 2015 and 2014 was $399 thousand and
$180 thousand , respectively.
10. Employee Stock Purchase Plan
In December 2013, the Board of Directors of the Company adopted the 2014 Employee Stock Purchase Plan covering up to 250,000 shares of Common
Stock (the "ESPP”), which was ratified by a vote of the Company's shareholders in February 2014. Under the ESPP, the Company’s employees may purchase
shares of common stock at a price per share that is currently 95% of the lesser of the fair market value as of the beginning or end of semi-annual option periods.
Pursuant to the ESPP the company issued 31,163 and 13,507 shares for the two years ended September 30, 2015 and September 30, 2014, respectively. Since
inception of the plan, there are 205,330 shares available for future issuance under the ESPP as of September 30, 2015.
11. Pension and Retirement Plans
We have defined benefit and defined contribution plans in the U.K., Germany and in the U.S. In the U.K. and Germany, the Company provides defined
benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees. The defined benefit plans in
both the U.K. and Germany are closed to newly hired employees and have been for the two years ended September 30, 2015 . In the U.S., the Company also
provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now
retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2015 . These
supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the
future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant. These whole life
insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the defined benefit plans. In
the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain
officers. The Company also funds these supplemental plans' obligations through whole life insurance policies on the officers.
53
Defined Benefit Plans
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 sheet.
The German Plan does not have any assets and therefore all costs and benefits of the plan are funded annually with cash flow from operations.
The domestic supplemental retirement plans have life insurance policies which are not considered plan assets but were purchased by the Company as a
vehicle to fund the costs of the plan. These insurance policies are included in the balance sheet at their cash surrender value, net of policy loans, aggregating $2.0
million and $1.9 million as of September 30, 2015 and 2014 , respectively. The loans against the policies have been taken out by the Company to pay the
premiums. The costs and benefit payments for these plans are paid through operating cash flows of the Company to the extent that they can not be funded through
the use of the cash values in the insurance policies. The Company expects that the recorded value of the insurance policies will be sufficient to fund all of the
Company's obligations under these plans.
Assumptions:
The following table provides the weighted average actuarial assumptions used to determine the actuarial present value of projected benefit obligations at:
Discount rate:
Expected return on plan assets:
Rate of compensation increase:
Domestic
September 30,
International
September 30,
2015
2014
2015
2014
4.25%
4.25%
3.10%
4.20%
1.00%
3.25%
4.40%
1.00%
The following table provides the weighted average actuarial assumptions used to determine net periodic benefit cost for years ended:
Discount rate:
Expected return on plan assets:
Rate of compensation increase:
Domestic
September 30,
International
September 30,
2015
2014
2015
2014
4.25%
5.00%
3.25%
4.40%
1.00%
4.40%
4.90%
1.00%
For domestic plans, the discount rate was determined by comparison against the Citigroup Pension Discount Curve and Liability Index for AA rated
corporate instruments. The Company monitors other indices to assure that the pension obligations are fairly reported on a consistent basis. The international
discount rates were determined by comparison against country specific AA corporate indices, adjusted for duration of the obligation.
The periodic benefit cost and the actuarial present value of projected benefit obligations are based on actuarial assumptions that are reviewed on an annual
basis. The Company revises these assumptions based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost
of providing retirement benefits.
54
The components of net periodic benefit costs related to the U.S. and international plans are as follows:
Pension:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service gains
Amortization of net (gain)/loss
Net periodic benefit cost
Post Retirement:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service costs/(gains)
Amortization of net (gain)/loss
Net periodic benefit cost
Pension:
Increase (decrease) in minimum liability included in other comprehensive income
(loss)
Post Retirement:
Increase (decrease) in minimum liability included in other comprehensive income
(loss)
Total:
Years Ended September 30
2015
2014
Foreign
U.S.
Total
Foreign
U.S.
Total
(amounts in thousands)
$
56 $ — $
56 $
45 $ — $
634
(423)
—
193
52
—
—
(3)
686
(423)
—
190
770
(472)
—
93
69
—
—
(9)
45
839
(472)
—
84
$
$
$
$
460 $
49 $
509 $
436 $
60 $
496
— $
34 $
34 $
— $
10 $
—
—
—
—
44
—
44
—
—
(50)
—
(50)
—
—
—
—
43
—
—
(142)
— $
28 $
28 $
— $
(89) $
10
43
—
—
(142)
(89)
163 $
(6) $
157 $
1,868 $
20 $
1,888
—
(89)
(89)
—
276
276
Increase (decrease) in minimum liability included in comprehensive income (loss)
$
163 $
(95) $
68 $
1,868 $
296 $
2,164
55
The following table presents an analysis of the changes in 2015 and 2014 of the benefit obligation, the plan assets and the funded status of the plans:
Pension:
Change in projected benefit obligation (“PBO”)
Balance beginning of year
Service cost
Interest cost
Changes in actuarial assumptions
Foreign exchange impact
Benefits paid
Projected benefit obligation at end of year
Changes in fair value of plan assets:
Fair value of plan assets at beginning of year
Actual gain (loss) on plan assets
Company contributions
Foreign exchange impact
Benefits paid
Fair value of plan assets at end of year
Funded status
Unamortized net loss
Net amount recognized
Post Retirement:
Change in projected benefit obligation (“PBO”):
Balance beginning of year
Service cost
Interest cost
Changes in actuarial assumptions
Foreign exchange impact
Benefits paid
Projected benefit obligation at end of year
Changes in fair value of plan assets:
Fair value of plan assets at beginning of year
Actual gain/(loss) on plan assets
Company contributions
Foreign exchange impact
Benefits paid from plan assets
Fair value of plan assets at end of year
Funded status
Unamortized net loss
Net amount recognized
Foreign
2015
U.S.
Years Ended September 30
Total
Foreign
(Amounts in thousands)
2014
U.S.
Total
$
18,919 $
1,228 $
20,147 $
16,651 $
1,371 $
18,022
$
$
$
$
$
$
56
635
304
(1,534)
(401)
—
52
(8)
—
(250)
56
687
296
(1,534)
(651)
45
770
2,336
(389)
(494)
—
69
10
—
(222)
45
839
2,346
(389)
(716)
17,979 $
1,022
$
19,001
$
18,919
$
1,228
$
20,147
10,094 $
— $
10,094 $
9,473 $
— $
9,473
(117)
398
(673)
(401)
—
251
—
(251)
(117)
649
(673)
(652)
718
393
4
(494)
—
222
—
(222)
718
615
4
(716)
9,301 $
— $
9,301 $
10,094
— $
10,094
(8,678) $
(1,022) $
(9,700) $
(8,825) $
(1,228) $ (10,053)
—
—
—
—
—
—
(8,678) $
(1,022)
$
(9,700)
$
(8,825)
$
(1,228)
$ (10,053)
— $
1,045 $
1,045 $
— $
857 $
—
—
—
—
—
34
44
34
44
(138)
(138)
—
—
—
—
—
—
—
—
—
10
43
135
—
—
857
10
43
135
—
—
$
— $
985 $
985 $
— $
1,045 $
1,045
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
— $
—
—
—
—
—
—
(985) $
(985) $
— $
(1,045) $
(1,045)
—
—
—
—
—
— $
(985) $
(985) $
— $
(1,045) $
(1,045)
$
$
$
56
The amounts recognized in the consolidated balance sheet consist of:
Pension:
Accrued benefit liability
Deferred tax
Accumulated other comprehensive income
Net amount recognized
Post Retirement:
Accrued benefit liability
Deferred tax
Accumulated other comprehensive income
Net amount recognized
Total pension and post retirement:
Accrued benefit liability
Deferred tax
Accumulated other comprehensive income
Net amount recognized
Accumulated Benefit Obligation:
Pension
Post Retirement
Total accumulated benefit obligation
Foreign
2015
U.S.
Years Ended September 30
Total
Foreign
(Amounts in thousands)
2014
U.S.
Total
$
$
$
$
$
$
$
$
(8,678) $
(1,022) $
(9,700) $
(8,825) $
(1,228) $
(10,053)
(490)
5,623
24
11
(466)
5,634
(531)
5,419
22
14
(509)
5,433
(3,545) $
(987) $
(4,532) $
(3,937) $
(1,192) $
(5,129)
— $
(985) $
(985) $
— $
(1,045) $
(1,045)
—
—
165
(73)
165
(73)
—
—
145
(4)
— $
(893) $
(893) $
— $
(904) $
145
(4)
(904)
(8,678) $
(2,007) $
(10,685) $
(8,825) $
(2,273) $
(11,098)
(490)
5,623
189
(62)
(301)
5,561
(531)
5,419
167
10
(364)
5,429
(3,545) $
(1,880) $
(5,425) $
(3,937) $
(2,096) $
(6,033)
(17,866) $
(1,022) $
(18,888) $
(18,798) $
(1,228) $
(20,026)
—
(985)
(985)
—
(1,045)
(1,045)
(17,866) $
(2,007) $
(19,873) $
(18,798) $
(2,273) $
(21,071)
Plans with projected benefit obligations in excess of plan assets are attributable to unfunded domestic supplemental retirement plans, our German plans
which are legally not required to be funded and our U.K. retirement plan.
Accrued benefit liability reported as:
Current accrued benefit liability
Non-current accrued benefit liability
Total accrued benefit liability
September 30,
2015
2014
(Amounts in thousands)
$
$
675 $
10,009
10,684 $
658
10,440
11,098
As of September 30, 2015 and 2014 the amounts included in accumulated other comprehensive income, consisted of deferred net losses totaling
approximately $5.6 million and $5.4 million , respectively.
The amount of net deferred gain expected to be recognized as a component of net periodic benefit cost for the year ending September 30, 2015, is
approximately $67 thousand .
Contributions
The Company expects to contribute $0.7 million to its pension plans for fiscal 2016.
57
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (amounts in thousands):
Fiscal year ending September 30:
(Amounts in thousands)
2016
2017
2018
2019
2020
Thereafter
Plan Assets
$
682
673
642
694
717
4,223
At September 30, 2015 , our pension plan in the U.K. was the only plan with assets, holding investments of approximately $9.3 million . Pension plan assets
are managed by a fiduciary committee. The Company's investment strategy for pension plan assets is to maximize the long-term rate of return on plan assets within
an acceptable level of risk while maintaining adequate funding levels. Local regulations, local funding rules, and local financial and tax considerations are part of
the funding and investment process. In deciding on the investments to be held, the trustees take into account the risk of possible fluctuations in income from, and
market values of, the assets as well as the risk of departing from an asset profile which broadly matches the liability profile. The committee has invested the plan
assets in a single pooled fund with an authorized investment company (the “Fund”). The Fund selected by the trustees is consistent with the plan's overall
investment principles and strategy described herein. There are no specific targets as to asset allocation other than those contained within the Fund that is managed
by the authorized investment company.
The fair value of the assets held by the UK pension plan by asset category are as follows:
September 30, 2015
September 30, 2014
Fair Value Measurements Using Inputs Considered as
Fair Value Measurements Using Inputs Considered as
Fair Values as of
Asset Category
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Cash on deposit
Pooled Funds
Total Plan Assets
$
$
324 $
324 $
— $
8,977
—
8,977
9,301 $
324 $
8,977 $
— $
—
— $
352 $
352 $
— $
9,742
—
9,742
10,094 $
352 $
9,742 $
—
—
—
(Thousands)
The expected long-term rates of return on plan assets are equal to the yields to maturity of appropriate indices for government and corporate bonds and by
adding a premium to the government bond return for equities. The expected rate of return on cash is the Bank of England base rate in force at the effective date.
The Company uses the Net Asset Value ("NAV") to determine the fair value of the underlying investments which (a) do not have readily determinable fair
value; and (b) prepare their financial statements consistent with the measurement principles of an investment company. The Fund is not exchange traded. The Fund
is not subject to any redemption notice periods or restrictions and can be redeemed on a daily basis. No gates or holdbacks or dealing suspensions are being applied
to the Fund. The Fund is of perpetual duration.
Defined Contribution Plans
The Company has defined contribution plans in domestic and international locations under which the Company matches a portion of the employee's
contributions and may make discretionary contributions to the plans. The Company's contributions were $174 thousand and $186 thousand for the years ended
September 30, 2015 and 2014 , respectively.
58
12. Lines of Credit
As of September 30, 2015 and September 30, 2014 , the Company maintained a line of credit notes that allows for borrowings of up to $1.0 million .
Availability under this facilities is reduced by outstanding borrowings thereunder. The interest rates on outstanding borrowings is the London Inter-Bank Offer
Rate (“LIBOR”) plus 2.5%, with a floor of 4% . Borrowings under the credit agreement are required to be repaid on demand by the lender in some cases, upon
termination of the agreements or may be prepaid by the Company without penalty. The credit agreements is not subject to financial covenants and the Company
did not borrow under the line of credit during the fiscal years ending September 30, 2015 and 2014.
As of September 30, 2015 and September 30, 2014 , the Company maintained an inventory line of credit that may be used by the the TS in the US to
purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. No interest accrues under the inventory line of credit
when advances are paid within terms, late payments are subject to an interest charge of Prime plus 5%. The credit agreements contain financial covenants which
require the Company to maintain the following division specific financial ratios: (1) a minimum current ratio of 1.2 , (2) tangible net worth of $2.5 million and (3)
a maximum ratio of total liabilities to total net worth of less than 5.0 :1. As of September 30, 2015 and September 30, 2014, Company borrowings under the
inventory line of credit were $2.9 million and $2.1 million , respectively, and the Company was in compliance with all covenants for the inventory line of credit as
of September 30, 2015 and 2014.
13. Commitments and Contingencies
Leases
The Company occupies office space under lease agreements expiring at various dates during the next five years. The leases are classified as operating leases
and provide for the payment of real estate taxes, insurance, utilities and maintenance.
The Company was obligated under non-cancelable operating leases as follows:
Fiscal year ending September 30:
(Amounts in thousands)
2016
2017
2018
2019
2020
$
$
868
789
724
653
399
3,433
Occupancy expenses under the operating leases approximated $1.3 million in 2015 and $1.3 million in 2014 .
Common Stock Repurchase
From time to time the Company's Board of Directors passes resolutions to authorize the Company to purchase shares of its outstanding common stock. The
Company did not repurchase any shares during the years ended September 30, 2015 and 2014. As of September 30, 2015 the Company is authorized to repurchase
an additional 201 thousand shares pursuant to such resolutions.
59
14. Segment Information
The following table presents certain operating segment information.
For the Years Ended September 30,
HPP
Segment
Germany
United
Kingdom
U.S.
Total
Consolidated
Total
TS Segment
(Amounts in thousands)
2015
Sales:
Product
Service
Total sales
Profit (loss) from operations
Assets
Capital expenditures
Depreciation and amortization
2014
Sales:
Product
Service
Total sales
Profit (loss) from operations
Assets
Capital expenditures
Depreciation and amortization
$
9,894 $
7,808 $
4,025 $
44,720 $
56,553 $
4,054
13,948
485
16,668
156
247
15,043
22,851
549
14,557
216
172
1,114
5,139
(817)
2,720
3
34
2,648
47,368
9
13,051
349
193
18,805
75,358
(259)
30,328
568
399
$
9,151 $
9,273 $
2,131 $
38,322 $
49,726 $
5,384
14,535
1,352
16,966
216
225
15,790
25,063
466
13,499
211
185
1,299
3,430
(187)
3,464
90
32
3,269
41,591
52
12,378
73
192
20,358
70,084
331
29,341
374
409
66,447
22,859
89,306
226
46,996
724
646
58,877
25,742
84,619
1,683
46,307
590
634
Profit (loss) from operations is sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by
either non-operating charges/income or by income taxes. Non-operating charges/income consists principally of investment income and interest expense. All
intercompany transactions have been eliminated.
The following table details the Company's sales by operating segment for fiscal years September 30, 2015 and 2014 . The Company's sales by geographic
area based on the location of where the products were shipped or services rendered are as follows:
2015
2014
HPP
TS
Total
% of Total
HPP
TS
Total
% of Total
$
$
$
$
Americas
Europe
10,774
$
47,659
1,135
26,713
Asia
(Amounts in thousands)
$
2,039
$
986
58,433
$
27,848
$
3,025
$
13,948
75,358
89,306
66%
31%
3%
100%
10,918
$
992
$
2,625
$
42,643
27,403
38
53,561
$
28,395
$
2,663
$
14,535
70,084
84,619
63%
34%
3%
100%
16%
84%
100%
17%
83%
100%
Total
% of
Total
Substantially all Americas amounts are United States.
60
Long-lived assets by geographic location at September 30, 2015 and 2014 were as follows:
North America
Europe
Totals
Deferred tax assets by geographic location at September 30, 2015 and 2014 were as follows:
North America
Europe
Totals
September 30, 2015
September 30, 2014
$
$
(Amounts in thousands)
1,494 $
486
1,980 $
1,429
589
2,018
September 30, 2015 September 30, 2014
$
$
(Amounts in thousands)
2,254 $
770
3,024 $
2,300
822
3,122
The following table lists customers from which the Company derived revenues in excess of 10% of total revenues for the years ended September 30, 2015
and 2014 .
Customer A
Customer B
15. Fair Value Measures
For the year ended
September 30, 2015
September 30, 2014
Amount
% of
Revenues
Amount
% of
Revenues
$
$
17.1
14.3
(Amounts in millions)
19% $
16% $
15.2
15.7
18%
19%
The Company had no assets or liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2015 or September 30, 2014 ,
except for pension plan assets values, which are discussed in Note 11.
16. Dividend
On December 17, 2013, our board of directors declared a cash dividend of $0.10 per share which was paid on January 7, 2014 to stockholders of record as
of December 27, 2013. On February 11, 2014, our board of directors declared a cash dividend of $0.11 per share which was paid on March 11, 2014 to
stockholders of record as of February 27, 2014. On May 14, 2014, our board of directors declared a cash dividend of $0.11 per share which was paid on June 10,
2014 to stockholders of record as of May 30, 2014. On August 6, 2014, our board of directors declared a cash dividend of $0.11 per share which was paid on
August 29, 2014 to stockholders of record as of August 21, 2014, the record date.
On December 16, 2014, the Company's board of directors declared a cash dividend of $0.11 per share which was paid
on January 8, 2015 to shareholders of record as of December 28, 2014, the record date. On February 11, 2015, the Company's board of directors declared a cash
dividend of $0.11 per share which was paid on March 12, 2015 to shareholders of record as of February 26, 2015, the record date. On May 13, 2015, the
Company's board of directors declared a cash dividend of $0.11 per share which was paid on June 10, 2015 to shareholders of record as of May 29, 2015, the
record date. On August 12, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on September 11, 2015 to
shareholders of record as of August 26, 2015, the record date.
On December 23, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which will be paid on January 11, 2016 to
shareholders of record as of December 31, 2015, the record date.
61
17. Related Party Transactions
During the normal course of business, the company sold products to a company whose Board of Directors includes two members of CSP Inc.'s Board of
Directors. The total sales were $313,637 and $161,348 , for the fiscal years ended 2015 and 2014, respectively. The trade receivables were $12,540 and $29,260 as
of September 30, 2015 and 2014. respectively.
62
Each of the below listed subsidiaries is 100% directly owned by CSP Inc. except as otherwise indicated, and all are included in the consolidated financial
statements.
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
NAME OF SUBSIDIARY
CSP Inc. Securities Corp.
43 Manning Road
Billerica, MA 01821-3901
CSP Inc. Foreign Sales Corp., Ltd.
43 Manning Road
Billerica, MA 01821-3901
Modcomp, Inc (1).
1500 South Powerline Road
Deerfield Beach, FL 33442
(1) Modcomp has three subsidiaries operating in Europe
STATE OR OTHER JURISDICTION OF INCORPORATION/
ORGANIZATION
Massachusetts
U.S. Virgin Islands
Florida
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement Nos. 333-64493, 333-124030, 333-124031, 333-151024, and 333-207229
on Form S-8 of CSP, Inc and Subsidiaries of our report dated December 24, 2015, relating to our audit of the consolidated financial statements,
which is incorporated in this Annual Report on Form 10-K of CSP, Inc. and Subsidiaries for the year ended September 30, 2015.
EXHIBIT 23.1
Boston, Massachusetts
December 24, 2015
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Victor Dellovo, certify that:
1.
2.
I have reviewed this annual report on Form 10-K of CSP Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
December 24, 2015
/s/ Victor Dellovo
Victor Dellovo
Chief Executive Officer and
President
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary W. Levine, certify that:
1.
2.
I have reviewed this annual report on Form 10-K of CSP Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
December 24, 2015
/s/Gary W. Levine
Gary W. Levine
Chief Financial Officer
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of CSP Inc. (the “Company”) for the year ended September 30, 2015 , as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), each of the undersigned Chief Executive Officer, President and Chairman and Chief Financial
Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
December 24, 2015
December 24, 2015
By:
/s/ Victor Dellovo
Victor Dellovo
Chief Executive Officer and President and Director
By:
/s/ Gary W. Levine
Gary W. Levine
Chief Financial Officer