Greetings and welcome to CSP Inc.'s Fiscal Fourth Quarter and Full Year 2024 Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Michael Polyviou. Sir, you may begin.

Thank you, Alan. Hello, everyone, and thank you for joining us to review CSPi's fiscal fourth quarter and full year 2024 financial results, which ended September 30, 2024. 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'll then open the call for questions. During the Q&A session, we ask participants to limit themselves to one question and one follow-up question and then re-queue, if they have additional 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 terms 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 meant 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 the statements and the 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 report on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements are based on 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 the call over to Victor Dellovo, Chief Executive Officer. Victor, please go ahead.

Thanks, Michael, and good morning, everyone. Our fourth quarter and full year financial results came in pretty much as expected when we last talked with you in August. Recurring revenue, which has been an area we have committed to growing, increased 17% of the total sales compared to less than 5% of sales just a couple of years ago. Overall, we finished the year with more than $30 million in cash and cash equivalents as of September 30th, 2024. Technology Solutions business generated approximately $12.7 million in sales in the fourth quarter of fiscal 2024. We finished the quarter with plenty of momentum. For example, very little of our fiscal fourth quarter revenue came from our cruise ship customers. However, towards the end of the quarter and during the current fiscal first quarter, we've seen a pickup in the business, including the signing of a large order that should be executed during the next fiscal year. It was the first cruise ship order for Professional Services for our company in many quarters and piggybacks on the continued consistent momentum we built in the Ocean Freightliner market. Our freightliner operation customer continues to add new ships and choose to utilize our managed service offering following the retrofits, which have led to an increase in recurring revenue. We continue to see increased demand for our cloud clients who want to migrate the consumption of these services to our cloud group. We also have a dozen active cloud-based projects to accommodate the growth. We continue to invest in people and processes to provide managed service to assist our clients with the day-to-day operations of these environments. The pipeline remains very encouraging, so we are optimistic about our opportunities to grow the overall TS sales, especially the recurring revenue piece during the coming fiscal year. On the HPP side of the business, for the fourth quarter of fiscal 2024, we reported revenue of $0.4 million mostly from ARIA-based customers. Also, as we discussed in the prior conference call, we were in the process of transitioning our AZT PROTECT sales effort being led by Greg Fischer, an experienced 20-year OT Industry sales veteran who joined us in July of 2024 has redirected the organization to maximize our relationships with Rockwell Automation and other distribution partners. In the short amount of time, we've made significant progress in building the market for this unique product, and we entered the new fiscal year with great potential from Rockwell and the other distribution partners that primarily serve the middle market OT customers, which tend to have shorter sales cycles than the larger OT organizations. Our internal team will continue to address the large individual corporate OT buyers with the sales cycles extending up to 18 months, while they work closely with the distributors to build the short-term revenue from the middle market customers. An example was a deal we announced with a Fortune 500 Electric Energy Producer that selected ARIA Cybersecurity, AZT PROTECT to protect its critical OT infrastructure from malicious cyber-attacks. This was the first order of many to come as we will be as it will be a few thousand endpoints over the next three years. We will assist with the rollout as fast as the customer will allow. We believe this approach will result in a noted upturn in AZT PROTECT sales as fiscal 2025 unfolds. Working with Rockwell Automation and other distribution partners, our sales team has quickly expanded the leads for AZT PROTECT to over 100. Many of these leads were generated from the Rockwell Automation Fair back in late November of 2024. But Gary Southwell, our Vice President and General Manager of High Performance Products, presented an in-depth view of the latest attack techniques and their financial impact. Gary's presentation was one of the show's hits and was a major reason why we generated so many leads from our participation. We also had a booth at the American Petroleum Institute Show for Oil and Natural Gas in Houston, where we began a relationship with several large companies. We further expanded AZT PROTECT's awareness in the market by attending the Industrial Control System Security Week Show in Atlanta. While we work to convert the leads generated from these activities into AZ Tech sales during fiscal 2025, we will be supporting additional regional trade shows and events with our distributors throughout the year. I strongly believe the interest we are generating at the trade shows is fostered by nine major industry awards from AZT PROTECT that have been received since its launch, including the winner of the Application Security category at the 2024 Fortress Cybersecurity Award presented by Business Intelligence Group. Our efforts to sign new distributors and gain new customers has also benefited from the July CrowdStrike update failure that exposed the risk continuous cloud updates can have on critical OT applications, including industrial automation industry control systems. There is a recognition from the industrial automation vendors and their distribution channels that the traditional IT focused endpoint protection methodologies were not meeting their requirements. We believe companies using AZT PROTECT’s protection capabilities can prevent zero-day malicious code from taking critical systems down out of the box without having seen it before and then relying on cloud updates to block such attacks. We've proven this capability in the field under real-life operational circumstances. This alternative approach to protect industrial control systems is being received as welcome news by Rockwell Distributor Partners. The Rockwell Show was the mechanism needed to bring this news into the ecosystem. From there, we believe we can expand into other markets. We have one agreement already completed and three others in process with top-tier US based Rockwell distributors allowing our US team to work directly with the distributor sales teams to map out Targa's accounts to approach together. In summary, when we consider AZT PROTECT market momentum and the emergence of the Rockwell partnership, the growth of the managed service business, and the pickup in the cruise lines, we have potential to return to growth during fiscal 2025. With that, I will now ask Gary to provide a brief overview of the fiscal fourth quarter financial performance.

Thanks, Victor. For the fourth quarter ended September 30th, 2024, we reported revenue of $13 million compared to revenue of $15.3 million for the fiscal fourth quarter ended September 30th, 2023. Revenue was relatively flat compared to 2024 fiscal third and second quarters. Service revenue represented $4.0 million of overall sales compared to the year ago service revenues of $4.3 million. Gross profit for the three months ended September 30th, 2024 was $3.7 million or 28.4% of sales compared to $5.2 million or 33.8% of sales reflecting a higher percentage of product sales. Gross margins on our service revenue increased 160 basis points from last year's comparable figures. The company reported a net loss of $1.7 million or $0.18 loss per common share for the fourth quarter ended September 30th, 2024, compared to net income of $1.4 million or $0.15 per diluted share for fiscal fourth quarter ended September 30th, 2023. We had cash and cash equivalents of $30.6 million as compared to $25.2 million at the end of our 2023 fiscal year. The robust balance sheet ensures that the company has the resources to implement the AZT PROTECT product offering and other growth strategies. During the fourth quarter of 2024, the company repurchased 2,800 shares of stock at a total cost of $34,000. And the Board of Directors has approved the payment of a $0.03 per share quarterly dividend to shareholders of record at the close of business on December 27, 2024, payable on January 15, 2025. For the fiscal quarter, our engineering and development expenses were $793,000 compared to $705,000. The increase was for outside consulting and stock compensation. Our SG&A was $5.5 million compared to $4.8 million in the year-ago fiscal fourth quarter. The increase was based on increased legal, audit, tax, and recruiting expenses. For the full year ended September 30th, 2024, revenue was $55.2 million compared with revenue of $64.6 million in the prior year. Gross profit for the fiscal year was $18.9 million or 34.1% of sales compared to $21.9 million and 33.9% of sales with the decline largely attributed to product mix. We reported a net loss of $0.3 million or $0.04 per diluted share in the fiscal year ended September 30th, 2024, compared to the net income of $5.2 million or $0.55 of income per diluted share for the fiscal year ended September 30th, 2023. With that, I will turn it over to the operator to take your questions.

Thank you. At this time, we will be conducting our question-and-answer session. Thank you. Our first question is coming from Joseph Nerges with Segren Investments. Sir, your line is live.

Good morning, guys. How are you today?

Good morning, Jim.

Good morning, Jim.

Just one quick accounting point here. Gary, last year, I think you mentioned in our fourth quarter, we had a credit of $2.1 million for employment retention credit in our reporting of fourth quarter of last fiscal year. So obviously that number and when we're comparing fourth quarter this year versus fourth quarter last year, that credit didn't fall into this year. So that's a considerable number.

Absolutely, yes.

I'll go on to the, not really your question, but we talked about last year, Victor, quite a bit, we call proof-of-concept. And I realize the trade shows that you referred to were very recent. In fact, we were in one last week, I believe, in Oman.

Correct.

But the Rockwell was last month and then the Atlanta show, I think, was the month previous, whatever. So I'm assuming there's an enormous amount of leads come out of all those shows, but do we have any proof-of-concepts? Have we started testing any of these companies or even prior to where are we at today with testing? How many people are out there? How could I say, testing AZT PROTECT today?

Yes. From the shows, the one for Rockwell, it was right before Thanksgiving, and then you had Thanksgiving, and then it's literally only been like 10 business days that we've been able to contact those. But, yes, there's been a lot of conversation, but the one that was overseas, we actually are starting a POC, believe it or not, on Sunday that happened already just in a week. So, yes, there's been a lot of activity, a lot of conversations, and a lot of people like the POCs will start after the New Year, they're kind of already on vacation mode, but there's been a lot of good conversations and a lot of things that we have to follow-up on the New Year.

Yes. But even prior to that, we've had proof-of-concepts ongoing even from earlier this year?

Yes. And those will continue. I think maybe I misunderstood your question, but I thought you meant new just from those recent shows. But, yes, we have probably more than a dozen of POCs ongoing in various stages. The one that we closed with the energy company recently was over a year POC and we finally got awarded and there's some others that we're waiting, the POCs are done, and now we're just waiting either for budgets or we're waiting to see if we were the last ones standing on in the POCs. And a lot of them had said to us that decisions will be made in January. I don't know if that's true or not, if it moves, but we are waiting for a couple very promising things in January. So hopefully they come through.

And just to clarify, you've made PRs on this before, but we have three Fortune 500 companies now that are utilizing AZT PROTECT, a chemical company, the power company that you just referred to, and then a pharmaceutical company that we announced earlier this year, as well as the government, the Western Intelligence Agency that are utilizing AZT PROTECT. So we're not talking about small customers here that have looked at it and approved it. I just want to clarify that.

Yes. And there will be something coming out early next week about another positive development.

All right. I appreciate that. And one other point on the stock buyback, it will be like 2,800 shares. All I'm saying is, I think you guys and the Board ought to get maybe slightly more aggressive. I know we have a little more volume in the shares now than we did a year ago, but so we can buy more shares under the market conditions, but I would think that you guys should be seriously considering maybe upping the amount of shares that can be repurchased under the program. And I'll move on to somebody else's questions now. Thanks again, guys.

Thanks, Joe.

Thank you. Our next question is coming from Will Lauber with Visionary Wealth Advisors. Your line is live.

Yes, guys, just so people can realize and help us get a handle on how much money you guys are putting into this AZT effort for hopefully a huge payoff down the line. What would the earnings have been that division for this year?

But it was a loss. So I mean.

No, you said if you're taking out, if you took out AZT, but if it was just TS, it would.

Yes.

Yes, definitely. It would be profitable.

It would be very profitable, yes. Yes, that's something that I have to understand that TS is doing really, really well. They are the cash cow that's paying for all this R&D for AZT. And to grow the cash position and to have a true start-up and only have a small loss for the whole year. Like I said, people want earnings, they want dividends, they want cash growth, but AZT is truly a start-up with building; we have to build a whole food chain for distribution. There's a lot going on right now. But now that in building the sales team, getting partners, there's a lot going on on that side of it. And then we had Myricom sales last year. And unfortunately, because that product was over 20 years old, the big distributor or manufacturer actually that was building the boards no longer will build the board. So all that Myricom business from last year went away. There are some pieces and parts that we still sell, but they're minimal now. So if you really look at it, where we were and where we are, to Joe's point, our big customers that we have closed are all Fortune 500 customers. And that's where a lot of the testing, it took a lot of time through the POCs, but now we have four customers that are using it, that are happy. And now we're just, like I said, building out the food chain to try to get in front of more people, building our name recognition, which is, like I said on a prior call, is one of the things that I think is just because of our size and our name, it takes a lot more effort to get that sale over the fence just because we're competing with some other multi-billion dollar companies in this space.

Okay. Could you guys put an approximation on it? I mean, could we have earned $1 a share?

Yes, more than that, yes.

More than $1 a share? Okay. My next question was, the increase in your recurring revenue as a percentage is pretty impressive. When you look out say three, maybe five years down the line, what percentage do you think that could be and what's kind of your internal goals?

If we could double again in the next 24 months, that would be something that we would be proud of. And that's why we're very, very focused on that recurring revenue piece of it, especially in the cloud, the Microsoft business that we're bringing, we continue to grow, the engineers, the support staff, and the sales staff along with it. And then the MSP, once if we could get into the cloud play, the MSP usually comes after that. So they're adjacent to each other. If we could get one, we usually get the other. So, yes, our goal is to grow that as fast as possible. There are no limits on what we want to do, but at least a 10% to 15% growth minimum year-over-year, if not more.

Okay. All right.

The answer to your question, it would be about $0.56 per share.

Okay. All right. Thank you.

Thank you. Our next question is coming from John Crotty, who is a Private Investor. Your line is live.

Hi. Thanks for taking my call. I want to just say congratulations on the S500 Energy Company. 18 months is a long POC. I understand I've been involved with a few, and good job, especially having the patience. And for us investors, we need to have the patience of a dead person. So we're with you right along with it. Anyway, you've talked a lot about the Rockwell, and I read a lot, and that really seems like a great partnership with lots of leads. But I want to talk about the other partnerships you have. You have the large one in Australia. You mentioned there was a smaller one in the Middle East, and then we had a larger one that was out, in the US, I believe, in the East Coast with a lot of clients. Could you give us any feedback on that in terms of are they running proof-of-concepts? Do they have a large pipeline or any type of any info you would like to add?

The partner in Australia, they're not the largest partner, but we do have some POCs going on with them. They are good-sized opportunities. And they're not in the commercial sector, so things do take time there, but they are progressing. And, yes, and the partners that we're focused on right now, with the Rockwell is because we're really focused on that OT space and because we have the approval from Rockwell as a certified partner, that's kind of where our focus has been because getting into some of the other manufacturers takes time. Rockwell took us almost two years to get approved inside as a certified partner. So we're working with some of the other big manufacturers. We're in different stages of getting approval as a certified partner that can work inside their stack. So, yeah, everything is moving just at different paces, just depending on how fast in some of these large organizations, unfortunately, people leave, move or get fired. And sometimes you take two steps forward, and then someone leaves, and you've got to reeducate the new person, and we've seen that happen in some of these large manufacturing companies.

Yes, I agree. Go for the low hanging fruit because they're pushing you through. I agree. I also wanted to talk about what you mentioned a couple of calls ago that some of the government win that you had. They had many other divisions or departments or areas that were waiting for budgets to add it in. Is anything moving along with increasing any of the opportunities with existing customers, especially like you had mentioned with the Western Intelligence?

Yes. There's another opportunity I think that has moved forward. Timing on that is not, I'm not exactly sure, but there is a deal that I feel like in the next 90 days, we're hoping that will come in. And that's all I can say about that.

Okay. That's fair enough. And I know you have a lot of non-disclosures you got to be cautious with. That was it. That's what I wanted just to follow-up. Everything else read through and I like the response. And I like $0.56 a share on just the TS side. So that's good. All right. Thank you so much. Keep up the good work, guys.

Thank you.

Thank you. Our next question is coming from Douglas Johnson, who is a Private Investor. Your line is live.

Yes. How large are these AZT contracts you have with these three Fortune 500 companies?

Well, I can't disclose exactly, but one of them is in the millions, and the other ones, as I mentioned in the script, we're looking to get adopted inside their infrastructure. And some of these were what was left in the current budget and then we'll roll out, I mentioned the big energy, they have thousands of systems that they told us it could take up to three years to roll them out. We're hoping to speed that up by assisting with the installation. But there are thousands of endpoints, and it's how they roll out and how fast is kind of up to the customer.

Thank you. Our next question is coming from Jeffrey Stevens with Long Pond Capital. Your line is live.

Yes. What's going on guys?

How are you doing?

I want to reflect on a couple of years ago when you had a partnership with NVIDIA and announced their hardware and software. Have you had any discussions with them regarding AZT?

Yes. So we definitely have had conversations with them. That was one of the examples where some of the powers to be that we were talking with kind of moved on. So we kind of had to start from scratch a little bit on some of the contacts there. But there's definitely conversations. They're not moving as fast as we would like, but we do have some relationships there and we're talking more in their robotic area. That's kind of where we want to focus on AZT in that area. What comes from it? I can't say, but that's kind of our goal and our focus with those guys.

All right. Well, thank you so much.

Thank you.

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

Gary, Victor, Happy Holidays.

How are you, Brett? Same to you, Brett.

I'm doing good. Just got a couple of I'm going to limit it to one question. It's just going to be a multipart. I'll link it with and. Is there any legacy stuff at all going out in the E2D program? And can you give a little color on those UCaaS contracts that were announced in the last quarterly earnings release?

There is going to be a little E2D next year. It was supposed to be in this quarter. They moved it. So we're thinking it's going to be Q1. It could move out, but that's coming, as you note, towards the end, it is at the end of its career. But we believe there'll be one more next year in 2025. And then there'll be some pieces and parts, we're guessing, we're not sure exactly. And then on the UCaaS, we continue just to grow that business, bringing on new clients. There's been a few that we sold a deal last quarter, but it took some time to implement, and we turned on the billing in this quarter. So it will continue to grow over time. And these are usually three-year contracts.

Got it. And so that's this quarter and any headway since then?

The pipeline for UCaaS looks promising, as we are consistently adding one or two customers each quarter, regardless of their size. Our revenue is recurring on a monthly basis, whether it's $5,000 or $20,000, so we don't see large spikes. Our focus remains on enhancing our recurring revenue at this stage. We will continue selling our products and services as usual. Recently, we secured a significant professional service contract with one of the cruise lines worth nearly $1 million, set to be implemented over 2025. We are concentrating on high-margin professional services and recurring revenue, and we aim for multiyear deals wherever possible. The situation with Microsoft differs, as they only offer one-year or monthly contracts due to their specific program structure.

Got it. Well, thank you very much.

Yes. Have a good one. Happy Holidays.

Same to you.

Thank you. As we have no further questions in queue at this time, I'd like to hand the call back over to Mr. Dellovo for any closing comments.

Thank you. As always, I want to thank our shareholders for their continued interest and support. Good things are happening at CSPi and AZT PROTECT in generating more interest and gaining more and more momentum in the market. The increased activity we are experiencing is exciting and we look forward to updating you on our progress in February. Until then, best wishes for a healthy, happy holiday season. Thank you.

Thank you. Ladies and gentlemen, this concludes today's call, and you may disconnect your lines at this time. We thank you for your participation.