CSPI CSP, Inc.

Management Discussion

• Our revenues increased by approximately $1.6 million, or 8%, to $21.6 million for the three months ended June 30, 2019 as compared to $20.0 million for the three months ended June 30, 2018. The increase in revenue is the result of an increase of $2.5 million in our TS segment, offset with a $0.9 million decrease in our HPP segment. Our gross margin percentage decreased to 22% of revenues for the three months ended June 30, 2019 from 26% for the three months ended June 30, 2018. Operating income decreased by approximately $0.1 million from operating income of $0.2 million for the three months ended June 30, 2018 to operating income of $0.1 million for the three months ended June 30, 2019, primarily as a result decrease in gross margin percentage as a percent of revenue partially offset by a decrease in engineering and development expenses of $0.3 million. The decrease in operating expenses was primarily the result of $0.2 million decrease in our HPP segment. Our provision for income tax was a tax benefit of $326 thousand for the three months ended June 30, 2019 as compared to a tax expense of $249 thousand for the three months ended June 30, 2018. The effective tax benefit rate for the current quarter is 158%. The high effective tax rate was due in part to no tax expense recorded for U.K. income due to a large pension contribution, adjustments of taxes payable and reconciliation of tax provision to the prior year tax returns and the benefit of the research and development credit.