Good morning, and welcome to CSPI's Third Quarter Fiscal Year 2023 Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Michael Polyviou. Sir, the floor is yours.

Thank you, Ali. Hello, everyone, and thank you for joining us to review CSPI's fiscal 2023 third quarter results, which ended June 30, 2023. With me on the call today is Victor Dellovo, CSPI's Chief Executive Officer; and Gary Levine, CSPI's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we will then open the call for questions. Statements made by CSPI's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as the term is identified in Federal Securities Laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as similar expressions are intended to identify forward-looking statements. Forward looking statements should not be read as a guarantee of future performance or results. The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to several uncertainties, risks and other influences, many of which are beyond the company's control, that may influence the accuracy of statements and projections upon which the segment and statements are based. Factors that may affect the company's results include, but are not limited to, the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K and the quarterly reports on Form 10-Q filed with the Securities Exchange Commission. Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement, and CSPI undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date thereof. With that, I'll turn it over to Victor Dellovo, Chief Executive Officer. Vic, please go ahead.

Thanks, Michael, and good morning, everyone. Today, we reported continued momentum for our business as revenue grew 33%. Our performance was driven by the continued outperformance of our Technology Solutions business and I believe the results reaffirm our strategy to dedicate significant resources to this segment over the past couple of years. Our other product lines and business segments performed as expected during the quarter, and the business mix and tax treatment led to an increase in earnings. Gary is going to provide more details on the tax topic during his remarks. A major contributor to the momentum in the quarter was the continued conversion of the backlog to revenue, a good portion of which had been on the books for greater than 12 months as supply chain issues for the key components kept us from shipping completed orders to the customer. Our customers continue to remain loyal because of our products and solutions are the most effective, cost-efficient answers to their critical needs, and we are extremely pleased to finally move this backlog to revenue. Our focus over the next few quarters is to convert the remainder of this older backlog to revenue, and our team is constantly engaged with our customers to keep them abreast of the supply time lines and options. It is worth noting that throughout this prolonged supply chain issue, we have not lost a single order, which I believe reflects the importance of our products and our services to the business. Turning to some of the segment's results. Our TS business revenue totaled $16.4 million compared to $12.6 million in the year ago fiscal third quarter. As evidenced by the dramatic year-over-year increase, this segment continues to be driven by our customers' increased use of our implementation, installation and training capabilities. Our HPP revenue…

Thanks, Victor. As Victor mentioned in his opening remarks, we achieved significant growth in the fiscal third quarter compared to last year's fiscal third quarter. We reported revenue of $17.7 million, a 33% increase compared to $13.3 million in the year ago fiscal third quarter, as we have successfully converted some older backlog and delivered finished products to our customers. We reported gross profit of $5.9 million or 33.4% of sales compared to $4.9 million or 37.4% of sales in the year ago fiscal third quarter. As a reminder, a function in the quarterly gross revenue is anticipated due to business mix. However, we continue to believe our annual gross margin will expand as the business transaction -- transacts to higher-margin products -- transitions, excuse me. Our engineering and development expenses for the fiscal third quarter were $741,000 compared to approximately $884,000 in the year ago period. The year ago costs were higher primarily due to higher personnel costs, which included outside consultants, and the development of the AZT product, which, as mentioned earlier, was only recently unveiled. Our SG&A expenses in Q3 were $4.6 million compared to $4.1 million in the year ago fiscal third quarter due to increase in variable compensation for bonuses, sales commissions from higher sales as well as payroll and initial costs associated with the unveiling and launching of the AZT. Our tax benefit was $1.7 million for the third quarter, primarily for the -- from the release of the valuation allowance against the deferred tax asset. We performed an analysis and determined that it is more likely than not that substantially all of the deferred tax asset in the US jurisdiction will be utilized. We reported net income of $2.5 million in the fiscal third quarter or a diluted earnings per share of $0.52 compared with net income of $684,000 for a diluted earnings per share of $0.15 for the fiscal 2022 third quarter. The company had cash and cash equivalents of $13.8 million as of June 30, 2023, as compared to cash and equivalents of $23.9 million as of September 30th, 2022. The lower amount is primarily due to the strategy we implemented last year to leverage our strong balance sheet and finance certain large customer orders and preferable interest rates as well as the increased level of receivables created by product sales. However, in early Q4, a significant cash flow has been generated through the payment of receivables and the full repayment of financing provided to a customer during fiscal 2022. We believe the successful implementation of this approach also has yielded positive results, and we will entertain similar opportunities that it meets our strictest criteria. I also want to highlight that the Board of Directors approved a quarterly dividend of $0.04 per share, payable on September 12, 2023, to shareholders of record on the close of business on August 23, 2023. With that, I will turn it over to the operator to take your questions.

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question is coming from Mike Price, who is an Investor. Your line is live.

Thank you. Good morning. Congratulations on a great quarter. Previously, you had said that CSP has a problem with name recognition, and it seems like you have a revolutionary product, as you call it, the AZT. Has there been any discussions with anybody larger that can get this to the market faster and in a bigger way than CSP on its own?

Not currently. Right now, we just announced it less than 30 days ago, so we're looking to build a customer base. And then, as always, everything is on the table. If we were able to be approached, it would always be something we would look at.

Okay. And you said that the repayment -- the payment of the receivable is taking place in the fourth quarter. Does that bring the cash back over $20 million?

Pretty close to that.

Yes. Yes, pretty close. It's constantly changing based on payables. It's constantly moving, but it is close to that $20 million.

Right. Understand. You've categorized $2.4 million as held-to-maturity with interest rates. Short-term rates where they are, I assume that cash is earning a fair return even on a short-term basis?

Yes.

Okay. Because I'm looking at the cash that you have invested at short-term rates. That probably covers what the current dividend is on an annual basis. And it goes back to the question of having a company with a $60 million market cap with $20 million in cash and cash equivalents, the dividend is quite a bit lower than pre-COVID. And also, a question about the share repurchase. I think you authorized $194,000. I don't think you did anything in the previous quarter. What about the quarter just completed? Have any shares been repurchased?

A very small number.

Okay. Well, with the runway that you have, isn't this a good use of funds? I mean, it seems like this AZT PROTECT is the future of this company. And as shareholders, we can certainly get out in front of that by using some of the cash to repurchase shares. I appreciate the illiquidity in the stock, but whenever possible. I noticed Victor, in the last window, you bought a few hundred shares, which shows your confidence by opening up your wallet. It seems like the shareholders should be able to do the same.

Well, we'll take that under advisement, and we're constantly reviewing that with the Board. Right now, we're just investing in the AZT. And so -- but we'll take your advice.

Yes, in a cash fluctuation, too, having that $20 million. At times, as you see, it goes down is because some of our larger customers, these finance deals that we're doing at an interest rate, which is definitely in our favor to make their life a little easier just based on budgets that they may get preferral pricing model, but they don't want -- budgets are yearly instead of like multiyear. And those are the reasons why we're doing self-financing with these larger institutions. So that cash is important for us. And then having the reseller business, too, to get the lines of credit to buy the equipment, having that cash allows us to have large credit lines with the big distributors and manufacturers that allow us to place these multimillion dollar orders without having to go out and get financing, especially at the rates out there. So that's why that cash sometimes is important to have there because it kind of -- in some cases, like I said, it helps finance the deals that we may or may not get. And then second of all, it allows us to purchase the products that we need to with these big lines of credit that we have with these distributors. Maybe a little -- what color was the cash.

Why? And Last question or comment is, I understand, at the end of the fiscal year, you have 90 days to report. But it's a little frustrating that you take usually till mid-December. It's a full, what, 75 days to see results. Is there a reason that it takes so long? I mean, I don't see anybody in the full 90 days.

A lot if depends on the audit. Mike, a lot of it is dependent on the time. And one of the things that we have is we've got a lot of moving parts in our closing related to many of the products are shipped by the manufacturer. And then we have to go and spend a large amount of time just determining if -- what the cutoff between is a good -- is it in the quarter or not in the quarter. And that takes us a significant amount of time as well as the time we have to spend having the audit done.

Okay. All right. I appreciate your time.

We are trying to move it up.

Appreciate your time and great quarter and looking forward to the end of the year. Thanks a lot.

Thanks, Mike.

Thank you.

Thank you. Our next question is coming from Joseph Nerges with Segren Investments. Your line is live.

Good morning, guys. Congratulations on a great quarter and a great product introduction with this AZT PROTECT software. Well, two words for you is that, in the press release, initially, you used the term revolutionary. And in today's press release, you named -- you used the point of a potential game-changer for our product, and I agree wholeheartedly. Let me recommend one thing. I did review on the website. You have an extensive write-up on this product on the website, I mean, really extensive. And for any current investor or a potential investor, I really advise them to go to the website and review it there because there's so much detail that it's hard to convey just in a conference call. I don't know if you agree with me, but there's -- you really put a lot of color on this new product. So that's something that people should look into.

I appreciate it, Joe.

You talked in the last -- on your last press release -- last conference call about potentially expanding the managed service providers and you're talking about overseas. Have we made any headway on that? I know you talked about the Australian MSP that was just signed. But similar -- I'm assuming there's good potential for a lot of parts of -- especially European area or even the UK, where we are now. Have we any candidates there that we're currently talking to?

We're talking to them, but we want to make sure they have commitment, right? It's not just now the product on their catalog. But they're going to put time and resources, not just signed a reseller application in our agreement. So the conversations are going on, but we're not going to just sign up people just to be another line on their catalog. We want to make sure that they are committed to sell it.

Yes. Well, I've got that. That's great and I agree with you. But with this -- if they don't recognize -- if the potential of this AZT PROTECT product we just introduced, I mean, you should -- there should be a lot more serious discussions when this is now available for them in the future. We've got -- I mean --

Yes, yes. There's a lot -- there's quite a few in the US that we're talking to, and they're going well. I'll just leave it as that.

Do we have -- how many channel partners do we have? Do you have an off the -- approximately, how many channel partners have we signed over the years?

I would probably say five or six that are specialized in selling security.

Yes. And then you're talking to more, like you just -- as you just mentioned.

Yes. Yes.

All right. Have we -- are we still looking for any royalties on E-2D, either this year or currently and possibly next fiscal year?

It's liquid, but I'm thinking it's going to be Q1.

Okay. Okay, Q1.

Yes, Q1 of next year. It could roll into Q4, but I'm more comfortable saying Q1.

Okay. You mentioned in the press release about considerable attention from industry leaders. And I think you added to this a little bit, and you're just -- your current presentation. But are we talking about industry -- specific leaders in the industries, like you mentioned pharmaceuticals, transportation, energy. Okay.

Yes.

So we are cutting the base with some -- and I assume, in this case, some of them are pretty large. When you're just talking on utilities, most of them are pretty big. So --

Yes, they're all big, the ones that we've been talking to.

All right. Cool. Well, that's great. So the market there is a huge.

Yes. The OT space, where they have a lot of manufacturing, oil, gas, a lot of OT that -- the operational technology area, those are the companies that we're talking to right now. So --

Okay. Great. And just a follow-up to the previous question here, talking about the stock buyback. And I understand utilizing the money for marketing purpose, which we're doing in getting new deals. But when you think about a stock -- well, put it this way. When you have a potential game-changing revolutionary product and your stock is selling for less than one time sales, and it is less than one time sales, it certainly would suggest that buying an opportunist -- potential to buy some stock when you get the chance. Now I realize, we don't have -- the open market is hard to buy. Some days, we have very little volume. So you really are limited on what you could do. But again, if you just look at the combination of what we have available to us now and the fact that we're less than onetime sales, I mean, that's almost unheard of for a technology company to be at that level. So again, thanks a lot. Great quarter, and I'm hoping to hear from you guys again in early December on this. Great. Thanks again.

Thanks, Joe.

One other point. I mean one before I leave you. I'm going to give you a history from my perspective and a prediction here. Many years ago, there was a small company, and it was named Haloid Corporation. And they released a new product, and it was a Xerox copier. Well, the answer was the product was so successful that not long afterwards, they changed the name of their company from Haloid to Xerox. I predict that we have that same potential going down there. We may change the company name someday to ARIA Cybersecurity if our -- if this AZT PROTECT product is as successful as I think it could be. So I'm changing the name of the company for you. Again thanks a lot. Appreciate it.

All right. Thanks, Joe.

Thank you. Our next question is coming from Brett Davidson, who is an Investor. Your line is live.

Maybe you guys can answer for me what the new ticker is going to be?

Yes. ARIA.

Yes. It sounds like that might work. I got all kinds of different items I want to touch on. Was there any revenue this quarter from the cruise ship business?

Limited. Limited. There were some, though.

But that's still winding up?

Yes, yes. They're slow to make decisions right now. They're doing well, but they're prioritizing different projects at this point. But we're in talks. We're there. We're ready. But we're keeping the engineers busy with other projects while this other stuff is still -- it's moving just at a turtle's pace.

So probably not Q4, maybe sometime in --

No, there'll be some -- it's -- there's a revenue there, it's just not at the same peak it was once. But we are still getting revenue in projects for the various cruise lines.

So it's kind of like the beginning of just accelerating back to more normal levels.

Yes. We're hoping. There's -- we have a road map. We just have to have them execute on the road map.

Got it. The supply chain, I'm not -- I know before it was like nine months to get stuff for the ARIA hardware. What does that look like now? Or are we looking at half that time period? Or you can pretty get what you need when you need it?

For the ARIA piece of it, we're probably six weeks now for the ARIA hardware that goes along with it. And then the AZT PROTECT is all software, right? So it's instantaneous for that piece of it. It's -- on the TS side of the house, in some product lines, in manufacturers, it's pretty quick. I would say, anywhere from four to eight weeks. And then in certain of the product lines of the same manufacturers, in some cases, it's nine months still. So it's just -- it varies. A lot of switching products across the board, whether -- I don't want to name who they are, but some of the big players, it's still a lengthy process. Some of the dates we're getting is, believe it or not, it's 2025, in some cases.

Oh, no.

Yes. In some of the larger switches, the backlog is pretty bad. But in some other cases, different models, we can get in four weeks. So it's just -- it varies based on product line and manufacturers, in some cases. But it's definitely getting better. It's not getting worse, so -- which is good for us. But some of the backlog that we flushed out, what, it was close to a year old, that finally came in. And we're hoping that we continue flushing the backlog and putting that revenue to the books.

And the Australian distributor, now is that strictly services? Or are they also hardware?

They're strictly a security company, so they're both interested. Yes. We have opportunities both on the ADR, MDR. And we are talking to a few customers on the new release of the AZT product.

So are they directing customers to you? Or are they just reselling the ARIA?

They would be reselling it, but we're help -- supporting it on the technical side.

Got it. The significant cash flow, so I'm assuming that's all coming back from one customer. Is that accurate?

Majority from a customer, but there are -- it's probably clower different customers the cash flow coming in.

So the one big customer, I mean, is there a potential to run this through again with them? Or it's kind of like a one shot, one hit?

We have been doing for five years. We've been doing it for five years. So we've been doing it for five years. So -- and then we just signed another deal with a different customer for a give -year deal that took a multimillion dollar order and spread it over five years.

Got it. And these are popping up on a regular basis, I mean, are you guys using this as part of the sales pitch for these products? Or are there requests in this because it's been done before or other -- they heard from other customers? Or how is it that fees develop?

Well, we've probably been doing it for probably the last decade, but just on a smaller -- we weren't really in the market to do it. But some of the large customers that we do a lot of business with, they wanted the three or five year pricing, but they could not give it more -- they could cut a purchase order, but the budgets were year-by-year-by-year. So when we ended up doing one of the deals with them, then they kept requesting it. And they're a phenomenal customer, and they got more money than -- the risk is 0. So when we took it, we're like, we'll do it. And then a couple other customers that -- our last deal the customer requested is, he's like, Hey, we want you to do this for us. And we're like, yes, no problem." They're a creditworthy customer, and they're able to approximate this.

And it's all for delivery of product -- is it all for delivery of product now? Or is any of this written so the product is delivered over the life of the financing?

No, the product is delivered upfront and that they're using it. And then the support that goes along with it that gets --

So I mean has anybody approached you to do this as an extended delivery? So we need 10 this year, 10 next year, we'll finance it through you guys and sign a long-term deal, like that? Or nothing like that?

It's project-by-project, that's kind of how it looks. Like it could be a storage product or it could be a networking project or it could be a wireless project. It's based on the projects, not just -- they're usually good for IVE ED to 5 years. One of the customers we just -- one of the new orders we just did for a couple of million dollars on this was we did a deal priced at that for threeyears. And then the gear, they need to upgrade all their equipment, so we did another deal with them for 5 this year -- this time.

But do any of them involve equipment delivered over a multiyear time frame? Or is it all upfront?

No, they get it all upfront.

And I mean, do you see a scenario where you guys could possibly pitch that to have a recurring sales stream over like three to five years or something? Or nobody wants to commit that far out, though?

No, nobody wants to commit. We do a -- it's one deal, either three equal payments or five equal payments, depending on -- we try to do 3theree-year deals. Five is unusual, but it just depends. And that's kind of how we frame it. And then when the project gets renewed, because maybe the maintenance or the gear is becoming obsolete, then we'll try to roll them into a new opportunity.

Got it. I just want to add one comment directed at Mike. There is a huge CPA shortage, huge accounting graduate shortage. I can't see the audit ramping up any sooner because all of those firms are operating shorthanded. So I would be shocked if somehow that process can be shortened.

Yes. And then one thing that a year-end close is way different than a quarterly close, right? The amount of work that the audit firm does is quite significant compared to our quarterly close. So that's why it takes extra time. And to Gary's point, we have to wait at least two weeks or so to make sure the cutoff is correct in the orders and the product are getting put in either the Q4 or Q1. And that takes time because we have to work with the manufacturers or the distribution, looking at the cutoff in invoice state. So there's a lot more tedious work that goes into a year-end close to make sure that all the revenue goes into the correct quarter.

Yes. I mean, like that way, there is revenue recognition. Yes, heavy.

Got it. Yes, I know that the rules have become so obtuse that it's difficult to follow them -- the revenue recognition stuff.

Exactly.

And the last thing, have there been any sales book yet on that AZT product? Or we're still looking out like Q4?

Q4.

Got it. All right. Well, thanks so much for taking the time to answer the question. This one was pretty entertaining. Mike and Joe -- thanks again, guys. You take care. As I sit here and comfortable 73 degrees, SUNY Buffalo.

Have a good one.

Yeah, take care.

Thank you. [Operator Instructions] We have a question from Joseph Nerges from Segren Investments. Your line is love

Just to fill in Brett on the Australian question. The name of the company is Logitech. That's the Australian company. And there's a nice article out there on this particular association with ARIA. If he wants it, the title of the article is Cybersecurity for Manufacturers' Legacy OT Systems. And so if he puts Logitech and ARIA Cybersecurity in his Google search, you'll find that article. So just -- and for anybody, if they want to look it up, it's a nice article commentary by Gary Southwell, our General Manager, on that particular product.

All right. Thanks, guys.

We have a question from Will Lauber with Visionary Wealth Advisors. Your line is live.

Yes. Can you guys just kind of clarify what the Hawkeye, what -- I guess, you're getting just international sales now. And if there is any international sales, do you guys for sure get that revenue? Or how that works?

Yes. Well, it's coming -- it's really slowing down, Will. There hasn't been a lot of transactions that have gone on. There's -- we're getting pretty close to the end of the program. So we've had very little -- I mean there's just a few hundred thousand dollars that we believe is going to be available.

Okay. Because every once in a while, I see something about some other country buying some. But are they starting to get -- the international people starting to get some of the more advanced planes now that you guys aren't getting that anymore?

That's what we believe because there's not that many orders coming through.

Okay. And with this new ARIA product, can you kind of describe -- I guess looking back when you first started this product line, I guess, a couple of years ago, like what the level of interest is now with this new product compared to when you're starting out or even like a year later or something like that?

Well, the AZT piece of it, we've talked to a lot of customers already. We've hired a couple of new salespeople. But we just rolled it out, but all the feedback has been positive. We're doing things a little different than some of the other potential companies are doing. So they're very interested in hearing what we're doing, how we're doing it. The demos are going well. We were talking to a couple of large customers. They've already asked for pricing after the first meeting. So we're enthusiastic. We're asking them -- they know we just rolled it out, we're asking for feedback. And so they are being brutally honest. The good, bad and the ugly, and it's really hasn't been any ugly, which is good at this stage. So it's about taking the resources that we have, right, and just getting our name out there. We're going to put some energy with marketing more than we have in the past. I think, like I said, this product is just another -- it's a segment that needs attention. And I think the way we're doing it, we're approaching it is different. And we're going to put some time and money against it, getting our name out there. And like I said, we already hired two new salespeople over the last 30 days, a couple inside people to focus on this and hopefully start generating some revenue and taking that -- those profits and reinvesting them to continue the growth. So that's kind of the short-term game plan right now.

So you said these are all very large potential customers. Usually, that might imply a longer sales cycle. What is the standard sales cycle in the cybersecurity space? And how would you expect that to compare to this product?

Big companies don't move fast, but this product can be -- we can do a POC and get it implemented inside their infrastructure within 10 minutes, right? So there's not going to be a long POC time line to do this. If the budget is hit correctly, we're hoping to be able to close sales in a quick manner, right? In the larger companies, we're trying to focus on different divisions get some adoption of the product and then roll it out instead of trying to roll it out to all company-wide because that would take, I would say, minimum a year to do that. So we're trying to focus on getting a department or a division to adopt the product and roll it out that way, so we can evangelize it easier as it's already being adopted inside your organization. And then the next focus is to look at some medium-sized companies, which decisions are made a lot quicker. So I can't give you how long the average sales cycle is because on this particular product because. It's too new. On the SIEM product that we have, the sales cycle, I would say, is six months. It could be quicker, and it has been two months, but I would say, the average sales cycle is probably four to six months on the ADR and MDR.

So would it be safe to say, I mean, one of the possible good points about going with the clear customers is that the price point is probably somewhat of a drop in the bucket for them. I mean would that be safe to say or?

I would love to say that. But everybody is looking at every dollar right now. But compared to the security budget, I don't think we would cause a lot of harm if they were to adopt it throughout the organization. It's a necessary evil. And I got to believe security is going to be number one on their list to make sure that those dollars are put to securing their assembly lines, and whether it's a pharmaceutical organization or manufacturing.

Okay. All right. Well thank you very much.

Have a good one.

Thank you. As we have no more questions in queue at this time, I will hand it back to Mr. Dellovo for any closing comments he may have.

Thank you. As always, I want to thank our shareholders for their continued interest and support. We had success in the quarter converting some of the older backlog, which, I believe, demonstrates we are committed to fulfilling our customers' orders. Our reputation within the industry is stronger today and continues to rise, and the introduction of AZT product will only help our cause as we move forward. Gary and I look forward to sharing our progress in the fiscal 2023 fourth quarter and the full year ending September 30 operating results later this year. Until then, be well, stay safe, and enjoy the rest of the summer. Goodbye.

Bye.

Thank you. This concludes today's conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.