CSPI CSP, Inc.

Management Discussion

• Our revenues decreased by approximately $2.7 million, or 8%, to $32.7 million for the six months ended March 31, 2020 as compared to $35.3 million for the six months ended March 31, 2019. The decrease in overall revenue for the six months ended March 31, 2020 as compared to the prior fiscal year six month period is substantially the result of an approximately $1.6 million decrease in our TS segment revenue combined with a $1.1 million decrease in our HPP segment revenue. The TS segment revenue for the six months ended March 31, 2020 is primarily impacted by a decrease of sales to a major customer in the U.K. Division, partially offset in the U.S. division by increased volume of product sales to two major customers and increased volume in managed services revenue. The HPP segment revenue for the six month period ended March 31, 2020 is primarily impacted by decreased combined Myricom and Multicomputer product sales of $1.4 million, partially offset by higher royalties recognized of approximately $0.2 million on high-speed processing boards and increased revenues from Multicomputer service of $0.1 million during the six months ended March 31, 2020 as compared to the six month period ended March 31, 2019. Our overall gross margin percentage increased to 26% of revenue for the six months ended March 31, 2020 from 23% of revenues for the six months ended March 31, 2019. Our operating loss decreased by approximately $0.3 million resulting in an operating loss of $0.5 million for the six months ended March 31, 2020 as compared to operating loss of $0.8 million for the six months ended March 31, 2019,  primarily as a result of increased service revenues in combination with improved service margins. Our provision for income tax was a tax expense of $1.1 million for the six months ended March 31, 2020 as compared to a tax benefit of $140 thousand for the six months ended March 31, 2019. The effective tax expense rate for the current period is (635)%. The negative rate is high due to the recording of a valuation allowance against deferred tax assets during the quarter, as the Company has concluded that it is more likely than not that a portion of its deferred tax assets will not be realized in light of recent results, the COVID-19 pandemic, and the resulting economic fallout. The current tax expense is net of federal tax benefits anticipated from the carryback of current and prior period federal net operating losses, as allowed under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), to recover federal taxes paid in prior periods. The recording of a valuation allowance against deferred tax assets is a non-cash expense and the federal tax benefits will result in a cash refund.