CSP INC /MA/

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Organization and Business

CSP Inc. ("CSPi" or "CSPI" or "the Company" or "we" or "our") was incorporated in 1968 and is based in Lowell, Massachusetts. CSPi and its subsidiaries develop and market IT integration solutions, advanced security products, managed IT services, purpose built network adapters, and high-performance cluster computer systems to meet the diverse requirements of its commercial and defense customers worldwide. The Company operates intwo segments, its Technology Solutions (“TS”) segment and High Performance Products (“HPP”) segment.

1. Summary of Significant Accounting Policies

Basis of presentation

The accompanying interim condensed consolidated financial statements have been prepared by the Company and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been omitted.

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited condensed consolidated financial statements should be read in conjunction with the notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2025. The significant accounting policies and estimates used in preparing these Condensed Consolidated Financial Statements were applied on a basis consistent with those reflected in the September 30, 2025 Consolidated Financial Statements.

Significant Accounting Policies

There have been no significant changes to the Company's significant accounting policies described in PART II, Item 8, Note 1, "Basis of Presentation and Summary of Significant Accounting Policies", of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2025.

Accounting Pronouncement Not Yet Adopted as of December 31, 2025

In July 2025, the FASB issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides new optional guidance relating to the estimation of expected credit losses on current accounts receivable and current contract assets under Topic 326. This ASU permits entities to apply a practical expedient when estimating credit losses and is effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods, with early adoption permitted, and should be applied prospectively. We are currently evaluating the adoption of this standard and its impact to the Company's consolidated financial statements and related disclosures.

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income— Expense Disaggregation Disclosures (Subtopic 220-40), which requires expanded disclosures in the notes to the financial statements about certain costs and expenses. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the effect of this pronouncement on its disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU expands existing income tax disclosures primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The ASU is effective for all public entities for annual periods beginning after December 15, 2024, with early adoption permitted. Entities should apply the amendments on a

prospective basis, but retrospective application is permitted. The Company is currently evaluating the impact this ASU will have on its disclosures.

2. Revenue, Deferred revenue and contract liabilities, and Contract balances

Revenue

See details of timing of revenue recognition, whether CSPi acted as the principal or agent, and geography below. Geographic areas are based on which the products were shipped or services rendered.

In the TS US division, financing of goods and services is offered to certain customers. This involves amounts due reflecting sales whose payment terms exceed one year. SeeNote 5 Financing Receivables, net for more details. Revenue from these agreements in the three months ended December 31, 2025 was $655 thousand and CSPi acted as the agent. Revenue from these agreements in the three months ended December 31, 2024 was $23 thousand and CSPi acted as the agent.

Contract Assets and Liabilities

When we have performed work but do not have an unconditional right to payment, a contract asset is recorded. When we have the right to bill a customer, accounts receivable is recorded as an unconditional right exists. Current contract assets were $0.5 million and $0.8 million as of December 31, 2025 and September 30, 2025, respectively. Current contract assets were $1.7 million as of September 30, 2024. The current portion is recorded in Other current assets on the condensed consolidated balance sheets. There wereno noncurrent contract assets as of December 31, 2025 and September 30, 2025. There wereno noncurrent contract assets as of September 30, 2024. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.

Contract liabilities arise when payment is received before we transfer a good or service to the customer. Current contract liabilities were $1.6 million and $1.5 million as of December 31, 2025 and September 30, 2025, respectively. Current contract liabilities were $2.2 million as of September 30, 2024. The current portion of contract liabilities is recorded in Deferred revenue and contract liabilities on the condensed consolidated balance sheets. There were $50 thousand and $33 thousand of long-term contract liabilities as of December 31, 2025 and September 30, 2025, respectively. There were no long-term contract liabilities as of September 30, 2024. Long-term contract liabilities are in Other noncurrent liabilities on the condensed consolidated balance sheets. Revenue recognized for the three months ended December 31, 2025 that was included in contract liabilities as of September 30, 2025 was $0.6 million. Revenue recognized for the three months ended December 31, 2024 that was included in contract liabilities as of September 30, 2024 was $0.7 million.

Contract Costs

Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are equal to or less than a one year period, are expensed as incurred, utilizing the practical expedient inASC 340-40-25-4. For a period greater than one year, incremental contract costs are capitalized if we expect to recover these costs. The costs are amortized over the contract term and expected renewal periods. The period of amortization is generallyone tothree years. Incremental costs in fiscal year 2026 are related to commissions in the HPP segment and in fiscal year 2025 incremental costs were related to commissions in both segments. In fiscal year 2026 the TS segment paid commissions on a monthly basis for contracts over one year. Current capitalized contract costs are within Other current assets on the condensed consolidated balance sheets as of December 31, 2025 and September 30, 2025. The portion of current capitalized costs was $31 thousand and $33 thousand as of December 31, 2025 and September 30, 2025, respectively. There areno noncurrent capitalized costs on the condensed consolidated balance sheets. The amount of incremental costs amortized for the three months ended December 31, 2025 and 2024 were $10 thousand and $104 thousand, respectively. This is recorded in Selling, general, and administrative expenses. There wasno impairment related to incremental costs capitalized during the three months ended December 31, 2025 and 2024.

Other

Projects are typically billed upon completion or at certain milestones. Product and services are typically billed when shipped or as services are being performed. Payment terms are typically 30 days to pay in full except in Europe where it could be up to 90 days. Most of our contracts’ term are for less than one year. There are certain contracts that contain a financing component. SeeNote 5 Financing receivables to the condensed consolidated financial statements for additional information. We elected to use theoptional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that have an original expected contract term duration of one year or less. This is due to a low number of performance obligations, which are less than one year from being unsatisfied at each period end. Most of these contracts are related to product sales.

We have certain contracts that have an original term of more than one year. The royalty agreement is longer than one year but not included in the table below as the royalties are sales-based. Managed service contracts are generally longer than one year. For these contracts the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of December 31, 2025 is set forth in the table below:

3. Earnings Per Share of Common Stock

We are required to present earnings per share ("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 net income per common share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per share includes the dilutive effect of restricted stock awards (RSA’s), if any, calculated using the treasury stock method. Using the treasury stock method, the effect of dilutive securities includes the additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. The treasury stock method assumes proceeds from the unamortized compensation expense of restricted stock awards are used to repurchase common shares at the average market price during the period, thus reducing the dilutive effect. RSA’s with assumed proceeds per unit above the Company’s average share price for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive.

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

All anti-dilutive securities (RSA’s) are excluded from the diluted net income per share computation. Non-vested restricted stock awards of 87 thousand were excluded from net income per share for the three months ended December 31, 2025 because their inclusion would have been anti-dilutive.

4. Accounts receivable, net

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the current expected credit losses. The estimation of the allowance is based on an analysis of historical loss experience, management’s assessment of current conditions and reasonable and supportable expectation of future conditions as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible including reviewing the current receivables aging. This results in a general reserve and a specific reserve. The Company assesses collectability by pooling receivables where similar characteristics exist and evaluates receivables individually when specific customer balances no longer share those risk characteristics and are considered at risk or uncollectible. The expense associated with the allowance for expected credit losses is recognized in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations.

The following table presents the components of the Company’s accounts receivable for the periods indicated.

5. Financing receivables, net

In the TS U.S. division, financing of goods and services is offered to certain customers. This involves amounts due reflecting sales whose payment terms exceed one year. This financing is separate from agreements with a leasing component, see* Note 7 Leases* for financing through leases. Determining whether to offer financing involves looking at the customer’s payment history, economic conditions, and capacity to pay. These financing arrangements do not contain collateral.

The Company assigns an internal risk rating to each customer at inception, which groups customers into a portfolio based off this risk rating. A risk rating is assigned by analyzing a customer’s financial statements and the latest Fitch rating if publicly available as well as recent payment activity. The credit quality of customers is continually monitored by these items. Accounts rated low risk have the equivalent of a Fitch rating of BBB– or higher, moderate risk accounts have the equivalent of BB, and high risk accounts have the equivalent of B.

The risk characteristics of each customer are consistent with the Fitch rating or equivalent, which are defined by Fitch as the following:

'BBB' ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.

’BB' ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.

‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

Financing receivables, net carry an average weighted interest rate of 8.6%, which reflects the approximate interest rate consistent with a separate financing transaction with the customer at the inception of the agreement.

The amount of interest income earned from sales whose payment terms exceed one year for the three months ended December 31, 2025 and 2024 was $342 thousand and $141 thousand, respectively. Interest income from these agreements is recorded in Interest income on the Condensed Consolidated Statements of Operations.

The following table presents the components of the Company’s Financing receivables, net segregated by portfolio (risk rating) for the periods indicated:

The following table presents the changes in Allowance for credit losses for Financing receivables, net for the periods indicated:

The Company recognizes an allowance for credit losses for financing receivables in an amount equal to the probable losses net of recoveries. A probability method for calculating credit losses is used based on historical data of defaults of Fitch ratings and length of time. Various factors are also assessed in the allowance for credit losses including internal historical data as well as macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the portfolios. Macroeconomic conditions include the level of gross domestic product (“GDP”) growth and unemployment rates, which directly correlate with our historical credit losses. The expense associated with the allowance for expected credit losses is recognized in Selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations.

Financing receivables whose payment terms exceedone year are placed on non-accrual status, meaning interest income stops being recorded, when the customer has a past due amount in excess of 30 days or reasonable doubt exists in collecting all interest and principal. A payment due in excess of 30 days is considered delinquent. If a payment is received for a receivable on non-accrual status the payment is first applied to interest and then principal. Recording interest income

resumes once no reasonable doubt exists regarding collecting all interest and principal. There wereno financing receivables placed on non-accrual status as of December 31, 2025 or September 30, 2025.

The following table presents Financing receivables, gross, including accrued interest, by credit quality indicator segregated by risk rating and year of origination as of December 31, 2025:

Contractual maturities of outstanding financing receivables are as follows:

6. Inventories

Inventories consist of the following:

7. Leases

Information related to both lessee and lessor

The components of lease costs for the three months ended December 31, 2025 and 2024 are as follows:

Supplemental cash flow information related to leases for three months ended December 31, 2025 and 2024 is below:

8. Accounts payable and accrued expenses, and Other noncurrent liabilities

The TS US division enters into certain multi-year agreements with vendors when also entering into some of the multi-year financing contracts the Company enters into with customers. SeeNote 5 Financing receivables, net for further information related to the multi-year agreements with customers.

There was not an interest rate stated in the agreements and therefore interest was imputed underASC 835 Interestas the payments in the exchange represented two elements: principal and interest. The average imputed interest rate for the agreements was determined to be 8.6% as of December 31, 2025. The rate was determined primarily based on the rate the Company could obtain by financing from other sources at the date of the transaction.

Interest expense related to these agreements for the three months ended December 31, 2025 and 2024 was $125 thousand and $75 thousand, respectively.

The amounts owed for these agreements are in Accounts payable and Other noncurrent liabilities because they are owed to vendors rather than banks or financial institutions for borrowings. SeeNote 9 Line of Credit for amounts due to financial institutions for borrowings.

Below are details of the agreements with the vendors that contain imputed interest:

The TS segment has many vendors it transacts with and does not have any specific agreement with these vendors that it must purchase certain products. Management believes other suppliers could provide similar products on comparable terms.

9. Line of Credit

As of December 31, 2025 and September 30, 2025, the Company maintained an inventory line of credit with a borrowing capacity of $15.0 million. It may be used by the TS and HPP segments 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, however, late payments are subject to an interest charge of the rate published in the Wall Street Journal as the “prime rate” plus 1%, which was 7.75% as of December 31, 2025. The line of credit automatically renews for one year periods unless terminated by the Company with at least 60 days’ notice or immediate termination by the lender. The collateral is a blanket UCC filing on Modcomp, Inc., a wholly-ownwed subsidiary, and CSPi assets. The credit agreement for the inventory line of credit contains 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 $4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5:1. As of December 31, 2025 and September 30, 2025, Company borrowings, all from the TS segment, under the inventory line of credit were $1.4 million and $0.9 million, respectively, and the Company was in compliance with all financial covenants. As of December 31, 2025 and September 30, 2025, this line of credit also included availability of a limited cash withdrawal of up to $1.0 million. As of December 31, 2025 and September 30, 2025 there wereno cash withdrawals outstanding.

10. Pension and Retirement Plans

The Company’s operations have defined benefit and defined contribution plans in the U.K. and in the U.S. In the U.K., the Company provides defined benefit pension plans and defined contribution plans for some of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain former employees. The U.S. supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. The Company also provides for officer death benefits through post-retirement plans to certain current officers of the Company in the U.S. All the Company’s defined benefit plans are closed to newly hired employees and have been since September 2009.

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 condensed consolidated balance sheets.

The Company’s pension plan in the U.K. is the only pension plan with plan assets. In fiscal year 2024 the company paid 8.5 million Great British Pounds to enter into a buy-in contract. This payment is subject to adjustment as a result of subsequent data cleansing activities. Under the terms of this buy-in contract, the insurer is liable to pay the benefits of the plan, but the Company still retains full legal responsibility to pay the benefits to members using the insurance payments.

The buy-in contract is treated as a plan asset. When the buy-in contract transitions to a buy-out contract the Company will no longer have legal responsibility to pay the benefits to the members. This transition is a significant event and the pension assets and liabilities will be remeasured at this time.

The components of net periodic benefit costs related to the U.S. and U.K. plans are as follows:

The fair value of the assets held by the U.K. pension plan by asset category are as follows:

*This fair value as of December 31, 2025 is based on the latest information available, which is as of September 30, 2025. The slight difference from September 30, 2025 is due to the Great British Pounds being converted into U.S. dollars at a different exchange rate.

11. Income Taxes

Income tax expense of $280 thousand was recorded for the three months ended December 31, 2025 compared to an income tax benefit of $115 thousand in the same period of 2024. For the three months ended December 31, 2025, the difference between our effective income tax rate and the U.S. federal statutory rate are the impact of tax credits that we expect to be able to utilize against federal and state taxes, the change in valuation allowance maintained against certain state tax credits, and non-deductible executive compensation. For the three months ended December 31, 2024, the difference between our effective income tax rate and the U.S. federal statutory rate are the impact of tax credits that we expect to be able to utilize against federal and state taxes and the change in valuation allowance maintained against certain state tax credits.

On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (“OBBBA”) into law. Key corporate tax provisions include the restoration of 100% bonus depreciation, immediate expensing for domestic research and experimental expenditures, changes to Section 163(j) interest limitations, and expanded Section 162(m) aggregation requirements. In accordance with ASC 740, the effects of the new tax law will be recognized in the period of enactment. The legislation has multiple effective dates, with certain provisions effective in 2025 and others to be implemented through

2027. We have evaluated the impact of the OBBBA and determined that it did not have a material effect on the Company’s financial statements for the three months ended December 31, 2025. We will continue to assess the implications of the OBBBA as further guidance becomes available but do not expect the legislation to have a material impact on the effective tax rate in future periods.

2028. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

13. Fair Value of Financial Assets and Liabilities

Under the fair value standards fair value is based on the exit price and defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement should reflect all the assumptions that market participants would use in pricing an asset or liability. A fair value hierarchy is established in the authoritative guidance outlined in three levels ranking from Level 1 to Level 3 with Level 1 being the highest priority.

Level 1: observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly

Level 3: unobservable inputs (e.g., a reporting entity’s or other entity’s own data)

The Company hadno assets or liabilities measured at fair value on a recurring (except our pension plan assets and whole life insurance policies, seeNote 10 Pension and retirement plans for pension plan assets) or non-recurring basis as of December 31, 2025 or September 30, 2025.

To estimate the fair value of the financial instruments below, quoted market prices are used when available and classified within Level 1. If this data is not available, we use observable market-based inputs to estimate fair value, which are classified within Level 2. If the preceding information is unavailable, we use internally generated data to estimate fair value which is classified within Level 3.

*Includes original maturity overone year

**Vendor financing agreements with original maturity overone year included within Accounts payable and accrued expenses and Other long-term liabilities

Cash and cash equivalents

Carrying amount approximated fair value.

Accounts receivable

Fair value was not materially different from carrying values.

Financing receivables, net

Fair value was estimated by discounting future cash flows based on the current rate with similar terms.

Vendor financing agreements within Accounts payable and accrued expenses and other long-term liabilities with original maturity over one year

Fair value was estimated by discounting future cash flows based on the current rate with similar terms.

Line of credit

The fair value of our line of credit is based on borrowing rates currently available to a market participant for loans with similar terms or maturity. The carrying amount of our outstanding revolving line of credit approximates fair value because the base interest rate charged varies with market conditions and the credit spread is commensurate with current market spreads for issuers of similar risk. No interest accrues under the inventory line of credit when advances are paid within terms.

14. Segment Information

The following tables present certain operating segment information for the three months ended December 31, 2025 and 2024.

Operating income (loss) from operations consists of sales less Cost of sales, Research and development expenses, and Selling, general and administrative expenses but is not affected by either other income/expense or by income taxes expense (benefit). Non-operating expenses/income consists principally of interest income from transactions with payment terms exceeding one year (see Note 5,Financing receivables, net for details), interest income from cash and cash equivalents, and interest expense. All intercompany transactions have been eliminated.

Concentrations of Credit Risk

All customers below are in the U.S. division of our TS segment. Each customer’s letter (e.g. “Customer B”) does not change meaning if Customer B is in multiple tables it is the same customer.

Below are customers with 10% or more of accounts receivables as of December 31, 2025 or September 30, 2025.

Below are customers with 10% or more of financing receivables as of December 31, 2025 or September 30, 2025.

The following table lists customers from which the Company derived revenues of 10% or more of total revenues for the three months ended December 31, 2025 or 2024.

15. Dividend

On December 16, 2025, the Company’s board of directors declared a dividend of $0.03 per share payable January 15, 2026, to shareholders of record on the close of business on December 26, 2025.