What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2020-12-28 compared with 2019-12-10 · 4 added, 318 removed, 7 unchanged (98% of the section changed)

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market information .

3 unchanged sentences

We had approximately 65 holders of record of our common stock as of December 23, 2020.

This number does not include stockholders for whom shares were held in a “nominee”

or “street”

This number does not include stockholders for whom shares were held in a “nominee” or “street” name.

We believe the number of beneficial owners of our shares of common stock (including shares held in street name) at that date was approximately 1,450.

For the fiscal years ended September 30, 2019 and 2018, the Company declared and paid cash dividends as follows:

As of May 14, 2020, we have suspended our stock repurchase program and the payment of quarterly cash dividends until further economic clarity.

For the fiscal years ended September 30, 2020 and 2019, the Company paid cash dividends as follows:

Date Declared

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This management’s discussion and analysis of financial condition and results of operations and other portions of this filing contain forward-looking information that involves risks and uncertainties.

Our actual results could differ materially from those anticipated by the forward-looking information.

You should review the “Special Note Regarding Forward Looking Statements”

and “Risk Factors”

sections of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

The following discussion should be read in conjunction with our financial statements and the related notes included elsewhere in this filing.

Overview of Fiscal 2019 Results of Continuing Operations

Revenue increased by approximately $6.2 million, or 8%, to $79.1 million for the fiscal year ended September 30, 2019 versus $72.9 million for the fiscal year ended September 30, 2018.

Our gross profit margin percentage decreased overall, from 25% of revenues for the fiscal year ended September 30, 2018 to 23% for the fiscal year ended September 30, 2019.

We generated an operating loss of approximately $0.8 million for fiscal year ended September 30, 2019 as compared to an operating loss of approximately $1.6 million for fiscal year ended September 30, 2018.

On July 31, 2018, we completed the sale of all the outstanding stock of our Germany division of our TS segment.

The one time gain recorded due to the sale of all the stock of Modcomp GmbH was approximately $16.8 million.

No income taxes were provided as the transaction was a tax-free exchange in the U.K.

The Modcomp GmbH’s results have been recorded as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations for all periods presented.

The following table details our results of operations in dollars and as a percentage of sales for the fiscal years ended:

September 30, 2019

September 30, 2018

(Dollar amounts in thousands)

Costs and expenses:

Cost of sales

Engineering and development

Selling, general and administrative

Total costs and expenses

Operating loss

Loss before income taxes

Income tax (benefit) expense

Net loss from continuing operations

Gain on sale of discontinued operations

Net loss from discontinued operations

Total income from discontinued operations

Net (loss) income

Revenue increased by approximately $6.2 million, or 8%, to $79.1 million for the fiscal year ended September 30, 2019 versus $72.9 million for the fiscal year ended September 30, 2018.

Our HPP segment revenue decreased by approximately $2.6 million primarily due to a decline of $1.7 million in royalty revenues, a decline of $0.2 million in Multicomputer service revenues, and a decline of $1.6 million in Myricom product revenues, partially offset by a $0.9 million increase in Multicomputer product revenues.

Our TS segment revenue increased by approximately $8.7 million from an increase of $11.5 million in our U.S.

division, partially offset with a decrease of $2.8 million in our U.K.

TS segment revenue change by product and services lines for the fiscal years ended September 30 were as follows:

(Dollar amounts in thousands)

The TS segment total revenue increased by approximately $8.7 million due to an increase of $11.5 million in our U.S.

division partially offset by a decrease of $2.8 million in our U.K.

The $7.0 million increase in TS

segment product revenue is attributed to an increase of $9.5 million in our U.S.

division offset by a decrease of $2.5 million in our U.K.

The increase in our U.S.

division was primarily associated with two major customers and the decrease in the U.K.

division was primarily associated with a decrease with one major customer.

The $1.8 million service revenue increase is related to an increase in the U.S.

division of $2.0 million, partially offset by a decrease in the U.K.

division of $0.2 million.

HPP segment revenue change by product and services lines for the fiscal years ended September 30 were as follows:

(Dollar amounts in thousands)

The decrease in HPP product revenues for the period of $0.6 million was primarily the result of an approximately $1.5 million decrease in Myricom product line shipments, partially offset by an increase in Multicomputer product line shipments of approximately $0.9 million for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018.

The decrease in HPP services revenues of approximately $2.0 million for the period was primarily the result of an approximately $1.7 million decrease in royalty revenues on high-speed processing boards related to the E2D program during the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018.

Our total revenues by geographic area based on the location to which the products were shipped or services rendered were as follows:

Increase (Decrease)

(Dollar amounts in thousands)

The $12.1 million increase in the Americas revenues for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018 is primarily due to increased revenues by our TS segment of approximately $15.2 million, partially offset with decreased sales by our HPP segment of approximately $3.1 million.

The $6.3 million decrease in Europe revenue is primarily due to decreased sales by our UK division of approximately $5.5 million combined with a decrease by our TS segment’s US division of approximately $0.3 million and a decrease in our HPP segment of approximately $0.5 million.

The decrease in sales to Europe is due to one large customer that had significantly lower activity for the year ended September 30, 2019 when compared to September 30, 2018.

The $0.4 million increase in Asia is primarily the result of increased revenues by our HPP segment of $1.1 million partially offset with a $0.7 million decrease in our TS segment.

Gross Margins

Our gross margins ("GM") decreased by approximately $0.4 million to $18.0 million in fiscal year 2019 as compared to gross margins of $18.4 million in fiscal year 2018.

The following table summarizes GM changes by segment for fiscal years 2019 and 2018:

Increase (Decrease)

(Dollar amounts in thousands)

The impact of product mix within our TS segment on gross margins for the fiscal years ended September 30 was as follows:

(Dollar amounts in thousands)

The overall TS segment gross margin as a percentage of sales remained the same in fiscal year 2019 when compared to fiscal year 2018.

The $0.6 million increase in our TS segment product gross margins resulted from an increase in product revenues in the U.S.

division, partially offset by a decrease in the U.K division.

The $1.1 million increase in the TS segment service gross margins primarily resulted from increased service revenues in the U.S.

The impact of product mix on gross margins within our HPP segment for the fiscal years ended September 30 was as follows:

Increase (Decrease)

(Dollar amounts in thousands)

The overall HPP segment gross margins as a percentage of sales decreased to 52% in fiscal year 2019 from 59% in fiscal year 2018.

The 7% decrease in gross margin as a percentage of sales in the HPP segment was primarily attributed to the impact of a decrease of $1.7 million in high margin Multicomputer royalty revenues.

Engineering and Development Expenses

The following table details our engineering and development expenses by operating segment for the fiscal years ended September 30, 2019 and 2018:

For the Year ended September 30,

(Dollar amounts in thousands)

By Operating Segment:

Engineering and development expenses decreased by $0.5 million to $2.8 million for the fiscal year ended September 30, 2019 as compared to $3.3 million for the fiscal year ended September 30, 2018.

The current fiscal year expenses were primarily for product engineering expenses incurred in connection with the development of the new

ARIA SDS cyber security products.

The decreased engineering and development expenses for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018 is primarily attributed to a decrease in consulting related expenses.

Selling, General and Administrative

The following table details our selling, general and administrative (“SG&A”) expenses by operating segment for the years ended September 30, 2019 and 2018:

For the year ended September 30,

(Dollar amounts in thousands)

By Operating Segment:

For fiscal year 2019 compared to fiscal year 2018, the TS segment SG&A spending increase of approximately $0.5 million is substantially the result of an increase in our U.S.

division of $1.2 million primarily attributed to variable selling expenses and additional engineering and sales hires.

This was partially offset by a $0.7 million decrease in the U.K.

division attributed to reduction in staff and variable compensation expense.

For fiscal year 2019 compared to fiscal year 2018, the HPP segment SG&A spending decrease of $1.2 million is primarily attributed to decreases in expenses related to the sale of our German operations, audit expenses, and variable compensation.

Other Income/Expenses

The following table details our other income/expenses for the years ended September 30, 2019 and 2018:

For the year ended

September 30, 2019

September 30, 2018

(Amounts in thousands)

Interest expense

Interest income

Foreign exchange gain (loss)

Other income, net

Total other income (expense), net

The decrease to other income (expenses) for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018 was primarily driven by a decrease in Other income, net of $0.3 million and a decrease of $0.1 million foreign exchange gain (loss), partially offset by an increase of $0.3 million in interest income.

The Company recorded an income tax benefit of approximately $71 thousand, which reflected an effective tax rate of 16.1% for the year ended September 30, 2019.

The tax benefit includes an increase in the valuation allowance for net operating losses for state income tax related in the High Performance Products segment where we also had a reversal of the uncertain tax position of $54 thousand as that the statute of limitations have expired.

For the year ended September 30, 2018, the income tax expense was approximately $882 thousand, which reflected an effective tax rate of (79.7%).

The impact of the Tax Reform Act, which was recorded in fiscal year 2018, included remeasurement of the Company’s US deferred tax assets and liabilities to a 24.3% for current and 21% for the non-current portions resulted in

a tax expense of approximately $588 thousand consisting of a reduction of the Company’s net deferred tax asset.

The Company recorded tax expense of approximately $771 thousand related to the deemed repatriation.

As of September 30, 2019, management assessed the positive and negative evidence in the U.S.

operations, and estimated that we will have sufficient future taxable income to utilize the existing deferred tax assets.

Significant objective positive evidence included the cumulative profits that we realized in recent fiscal years.

This evidence enhances our ability to consider other subjective evidence such as our projections for future growth.

Other factors that we considered are the likelihood for continued royalty income in future years, new product revenue from cyber security products, and our expectation that the TS segment will continue to be profitable in future years.

On the basis of this evaluation, as of September 30, 2019, we have concluded that our U.S.

deferred income tax asset related to net operating losses carryforward for the High Performance Products segment is more likely than not to be realized except for certain state net operating loss carryforwards and tax credit carry forwards.

We recorded a $235 thousand valuation allowance for certain state-related assets that are not likely to be realized.

It should be noted however, that the amount of the deferred tax asset not to be realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are increased, or if there is objective positive evidence in the form of cumulative earnings.

We also continue to maintain a full valuation allowance against our U.K.

deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards.

To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.

Results of Discontinued Operations

CSPi LTD, a wholly owned indirect subsidiary of the Company, sold all of the outstanding stock of Modcomp GmbH to Reply AG, an affiliate of Reply SpA, a holding company for a worldwide group of companies, on July 31, 2018 for $14.4 million cash, and recognized a gain of $16.8 million.

The divestiture of CSPi’s German operations and our increased cash position will enable us to focus time and resources on our higher-margin and greater-potential growth opportunities.

We are encouraged by the traction of our managed services business in the U.S.

and we intend to continue to invest and focus on our new ARIA SDS cyber security products and to capitalize on the proliferation of our wireless service business.

This divestiture of our German operations is another positive step toward our future growth.

The following table is a summary of the operating results of the Germany division of our TS segment which have been reflected as discontinued operations.

See Note 2 for additional information.

For the year ended

September 30, 2019

September 30, 2018

(Amounts in thousands)

Net loss from discontinued operations, net of tax

Liquidity and Capital Resources

Our primary source of liquidity is our cash and cash equivalents, which decreased by approximately $7 million to $18.1 million as of September 30, 2019 from $25.1 million as of September 30, 2018.

Significant sources of cash for the year ended September 30, 2019 included an increase in accounts payable and accrued expenses of approximately $6.4 million, proceeds from debt of approximately $1.0 million, and a decrease in refundable income taxes of approximately $0.6 million.

More than offsetting these significant sources of cash were an increase in long term receivables of approximately $5.3 million, an increase in other assets and deferred costs of approximately $3.1 million, an increase in accounts receivable of approximately $2.1 million, and payment of dividends of approximately $2.5 million.

C ash held by our foreign subsidiary in the United Kingdom totaled approximately $9.1 million as of September 30, 2019, which consists of 3.1 million euros, 0.2 million British Pounds, and 5.9 million U.S.

This cash is included in our total cash and cash equivalents reported above.

As of September 30, 2018, the Company maintained a line of credit that allows for borrowings of up to $1.0 million.

Availability under the facility was reduced by outstanding borrowings thereunder.

The interest rates on outstanding borrowings was London Inter-Bank Offer Rate ("LIBOR") plus 2.5%, with a floor of 4%.

Borrowings under the credit agreements are required to be repaid on demand in certain circumstances, upon termination of the agreements, or may be prepaid by the Company without penalty.

The Company had no amounts outstanding under the line of credit at September 30, 2018.

This line of credit closed during fiscal year 2019.

As of September 30, 2019 and September 30, 2018, the Company also maintained an inventory line of credit that may be used by the TS segment in the U.S.

to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors.

In fiscal year 2019, HPP gained access to this inventory line of credit, but did not use it.

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 Prime plus 5%.

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 5.0:1.

As of September 30, 2019 and September 30, 2018, Company borrowings under the inventory line of credit were $2.5 million and $3.2 million, respectively, and the Company was in compliance with all covenants.

For more information, please refer to Note 16 - Lines of Credit, in the Notes to our Consolidated Financial Statements contained in this annual report on Form 10‑K.

If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans, the equity markets, or other means.

There is no assurance that we will be able to raise any such capital on terms acceptable to us, on a timely basis or at all.

If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition or continue to effectively operate our business.

Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash generated from operations and availability on our lines of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for the foreseeable future.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, goodwill and intangibles, income taxes, deferred compensation, revenue recognition, retirement plans, restructuring costs and contingencies.

We base our estimates on historical performance and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

revenue recognition;

valuation allowances, specifically the allowance for doubtful accounts and net deferred tax asset valuation allowance;

inventory valuation;

and pension and retirement plans.

Revenue Recognition

Effective October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No.

2014‑09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

See Note 1 –

Summary of Significant Accounting Policies for effects of initial adoption.

The following reflects the accounting policy change for revenue starting on the date of adoption:

We derive revenue from the sale of integrated hardware and software, third-party service contracts, professional services, managed services, financing of hardware and software, and other services.

We recognize revenue from hardware upon transfer of control, which is at a point in time typically upon shipment when title transfers.

Revenue from software is recognized at a point in time when the license is granted.

We recognize revenue from third-party service contracts as either gross sales or net sales depending on whether the Company is acting as a principal party to the transaction or simply acting as an agent or broker based on control and timing.

The Company is a principal if it controls the good or service before that good or service is transferred to the customer.

We record revenue as gross when the Company is a principal party to the arrangement and net of cost when we are acting as a broker or agent.

Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or vendor is recorded in cost of goods sold.

Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to revenue resulting in net sales equal to the gross profit on the transaction.

Third-party service contracts are sold in different combinations with hardware, software, and services.

We have determined the third-party services contracts are a single performance obligation in each sale.

When the Company is an agent, revenue is typically recorded at a point in time.

When the Company is the principal, revenue is recognized over the contract term.

Professional services generally include implementation, installation, and training services.

Professional services are considered a series of distinct services that form one performance obligation and revenue is recognized over time as services are performed.

Revenue generated from managed services is recognized over the term of the contract.

Certain managed services contracts include financing of hardware and software.

Revenues from arrangements which include financing are allocated considering relative standalone selling prices of lease and non-lease components within the agreement.

The lease components include the hardware and software, which are subject to ASC 840.

The non-lease component includes the managed services and is subject to ASC 606.

Other services generally include revenue generated through our royalty, extended warranty, multicomputer repair, and maintenance contracts.

Royalty revenue is sales-based and recognized on date of subsequent sale of the product, which occurs on the date of customer shipment.

Revenue from extended warranty contracts is recognized evenly over the period of the warranty.

Multicomputer repair services revenue is recognized upon control transfer when the customer takes possession of the computer at time of shipping.

Revenue generated from maintenance services is recognized evenly over the term of the contract.

Variable consideration is immaterial.

Any products sold with right to return exists with the manufacturer.

Managed service contracts contain the right to refund if canceled within 30 days of inception.

Any products with a standard warranty are treated as a warranty obligation under ASC 460, Guarantees.

The following policies are applicable to our major categories of segment revenue transactions:

TS Segment Revenue

TS Segment revenue is derived from the sale of hardware, software, professional services, third-party service contracts, maintenance contracts, managed services, and financing of hardware and software.

Financing revenue is

recognized in accordance with ASC 840, Leases .

Financing revenue is recorded in revenue as equipment leasing and is part of the Company’s operations.

Third-party service contracts are evaluated to determine whether such service revenue should be recorded as gross sales or net and whether over time or at point in time.

HPP Segment Revenue

HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multicomputer and Myricom product lines.

Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products functionality, and post contract maintenance and support.

Post contract maintenance and support is considered immaterial in the context of the contract and therefore is not a separate performance obligation.

Significant Judgments

The input method using labor hours expended relative to the total expected hours is used to recognize revenue for professional services.

Only the hours that depict the Company’s performance toward satisfying a performance obligation are used for progress.

An estimate for professional services is made at the beginning of each contract based on prior experience and monitored throughout the services.

This method is most appropriate as it depicts the measure of progress towards satisfaction of the performance obligation.

When product and services are sold together, the allocation of the transaction price to each performance obligation is calculated using a budgeted cost-plus margin approach.

Due to the complex nature of these contracts, there is significant judgment in allocating the transaction price.

These estimates are periodically reviewed by project managers, engineers, and other staff involved to ensure estimates are appropriate.

For items sold separately, including hardware, software, professional services, maintenance contracts, other services, and third-party service contracts, there is no allocation performed as there is one performance obligation.

Contract Assets and Liabilities

When the Company has performed work but does not have an unconditional right to payment, a contract asset is recorded.

When the Company has the right to bill a customer, accounts receivable is recorded as an unconditional right exists.

Contract liabilities arise when payment is received before the Company transfers a good or service to the customer.

Contract Costs

Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are less than a one-year period, are expensed as incurred, utilizing the practical expedient in ASC 340‑40‑25‑4 .

For a period greater than one year, incremental contract costs are capitalized if the Company expects to recover these costs.

These costs are only capitalized if the contract is obtained.

The costs are amortized over the contract term and expected renewal periods.

The period of amortization is generally three to six years.

Incremental costs are related to commissions in the TS portion of the business.

Costs to fulfill a contract are capitalized when the costs are related to a contract or anticipated contract, generate or enhance resources that will be used in satisfying performance obligations in the future, and costs are recoverable.

Costs to fulfill a contract are related to the TS portion of the business and involve activities performed before managed services can be completed.

Current capitalized fulfillment costs are in the account other current assets on the consolidated balance sheets.

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.

There are certain contracts that do contain a financing component.

See Note 3 for details.

Most of the Company’s contracts are less than one year.

As a practical expedient, the Company has elected not to adjust the amount of consideration for effects of a significant financing component when it is anticipated the promised good or service will be transferred and the subsequent payment will be one year or less.

The Company elected to use the optional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that have an original expected duration of one year or less.

This is due to a low amount of performance obligations less than one year being unsatisfied at each period end.

Most of these contracts are related to product sales.

The Company has certain contracts that have an original term of more than one year.

The royalty agreement is longer than one year and managed service contracts are generally longer than one year.

Product Warranty Accrual

Our product sales generally include a 90‑day to three-year hardware warranty.

At time of product shipment, we accrue for the estimated cost to repair or replace potentially defective products.

Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.

Engineering and Development Expenses

Engineering and development expenses include payroll, employee benefits, stock-based compensation and other headcount-related expenses associated with product development.

Engineering and development expenses also include third-party development and programming costs.

We consider technological feasibility for our software products to be reached upon the release of the software, accordingly, no internal software development costs have been capitalized.

We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We also reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.

Valuation allowances are recorded against the gross deferred tax assets that management believes, after considering all available positive and negative objective evidence, historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets will not be realized.

In addition, we are required to recognize in the consolidated financial statements, those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date.

If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized.

In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions.

The Company records liabilities for estimated tax obligations in the U.S.

and other tax jurisdictions.

These estimated tax liabilities include the provision for taxes that may become payable in the future.

Intangible Assets

Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if events or circumstances indicate that the asset may be impaired.

We did not have intangible assets with indefinite lives at any time during the two years ended September 30, 2019.

Intangible assets subject to amortization are amortized over their estimated useful lives, generally three to ten years, and are carried at net book value.

The remaining useful lives of intangible assets are evaluated on an annual basis.

Intangible assets subject to amortization are also tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

If the fair value of an intangible asset subject to amortization is determined to be less than its carrying value, then an impairment charge is recorded to write down that asset to its fair value.

Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method.

The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition and changes in technology.

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Pension and Retirement Plans

The funded status of pension and other post-retirement benefit plans is recognized prospectively on the consolidated balance sheet.

Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive income, net of tax, until they are amortized as a component of net periodic pension/post-retirement benefits expense.

Additionally, plan assets and obligations are measured as of our fiscal year-end balance sheet date (September 30).

We 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 for certain employees and former employees and defined contribution plans for the majority of the employees.

The defined benefit plans in the U.K.

are closed to newly hired employees and have been for the two years ended September 30, 2019.

In the U.S., the Company provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now retired.

These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2019.

These supplementary plans are funded through whole life insurance policies.

The Company expects to recover all insurance premiums paid under these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant.

These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the defined benefit plans.

In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain officers.

The Company also funds these supplemental plans’

obligations through whole life insurance policies on the officers.

Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets, expected compensation increases and applicable discount rates.

Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisers and concluded they were reasonable.

A decrease in the expected return on pension assets would increase pension expense.

Expected compensation increases are estimated based on historical and expected increases in the future.

Increases in estimated compensation increases would result in higher pension expense while decreases would lower pension expense.

Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit.

A decrease in the discount rate would result in greater pension expense while an increase in the discount rate would decrease pension expense.

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 consolidated balance sheets.

Inflation and Changing Prices

Management does not believe that inflation and changing prices had significant impact on sales, revenues or income during fiscal years 2019 or 2018.

There is no assurance that the Company’s business will not be materially and adversely affected by inflation and changing prices in the future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity