What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-12-08 compared with 2020-12-28 · 126 added, 106 removed, 162 unchanged (59% of the section changed)

7 unchanged sentences

The outbreak has and continues to adversely affect the economies of the U.S., U.K., and other international markets and economies in which we operate.

As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic, national, state, and local governments have and continue to take actions such as declaring a state of emergency, implementing social distancing and other guidelines, and shutting down and/or limiting the opening or operation of certain businesses which are not considered essential.

The Company continues to comply with such actions causing most employees to work remotely in all locations.

Due to the pandemic, revenue decreased significantly for the fiscal year ended September 30, 2020 compared to fiscal year ended September 30, 2019.

The largest driver of this revenue decrease was our customers having budgetary cuts or holds.

However, we do anticipate returning to a regular volume of business in the future when the economy is fully open.

In our HPP segment, companies have delayed decisions to purchase ARIA due to the pandemic.

The pandemic has also had an adverse effect on our ability to transact one-on-one business in both segments.

Due to the uncertainty of the pandemic, including but not limited to, regulatory measures or voluntary actions that have and may be put in place to limit the spread of COVID-19 and the duration of such measures, the impact of any further spread of COVID-19, or the resurgence of COVID-19 in a given geographic region after it has hit its “peak,” at this time, and the timing and rollout of any approved vaccine to combat the spread of COVID-19, we cannot make a reasonable estimate on the extent or duration of the impacts on our business.

As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic, national, state, and local governments have and continue to take actions such as declaring states of emergency, implementing social distancing and other guidelines, and shutting down and/or limiting the opening or operation of certain businesses which are not considered essential.

In these times of pandemic, our top priorities are to protect the health, well-being, and safety of our employees and partners, while still focusing on the key drivers of our business.

To that end, and to insure we continue to operate safety and cautiously while also meeting our public health responsibilities, the Company has adopted flexible business practices including allowing most employees to work remotely in all locations.

Our sales decreased significantly for the year ended September 30, 2021, which we believe is primarily due to the pandemic.

This is largely the result of customers reducing their budgets.

The pandemic has also had an adverse effect on our ability to transact one-on-one business, which we believe is important when rolling out new IT and security products.

During fiscal year 2021 COVID-19 has adversely affected the distribution channel leading to significantly longer lead times when ordering product.

Manufacturers are not producing as much product as prior to the pandemic due to disruptions, resulting in supply shortages.

Additionally, recent global shipping delays have exacerbated this problem.

The TS segment has many vendors it transacts with and supply shortages are pervasive with many of them.

The HPP segment has also experienced shortages with their vendors as well.

Related to the supply shortage and potentially inflation, we have experienced price increases for our products, which we try to pass on to the customer.

We recognize the pandemic has created a dynamic and uncertain situation in the national economy, and we continue to closely monitor the latest information to make timely, informed business decisions and public disclosures regarding the potential impact of the pandemic on our operations.

Despite reduced infection rates and ever-increasing vaccination rates in the United States, many nations and certain pockets within the United States are still battling various

strains/variants of the novel coronavirus, creating ongoing uncertainties as to when economies will return to business as usual and what that will look like, what regulatory measures or voluntary actions will be further implemented to limit the spread of COVID-19 and its variants and the duration of any such measures.

The extent, severity and impact of any further spread of COVID-19 variants or resurgence of COVID-19 in a given geographic region after it has hit its “peak,” and the extent to which herd immunity will be achieved through the vaccination process is still uncertain.

In summary, the scope of this pandemic and its effects are unprecedented, and we cannot at this time make a reasonable estimate on the extent or duration of the impacts on our business.

Please refer to Item 1A Risk Factors located in Part I in this Annual Report on Form 10-K for discussion of the risks related to COVID-19 on our business, financial condition, and results of operations.

3 unchanged sentences

We generated an operating loss of approximately $1.4 million for the fiscal year ended September 30, 2021 as compared to an operating loss of approximately $1.4 million for the fiscal year ended September 30, 2020.

Other income, (expense) net was $2.0 million for the fiscal year ended September 30, 2021 as compared to $0.4 million for the prior year.

The increase of $1.6 million from prior year is due to a large one time gain on debt forgiveness of $2.2 million which did not occur in the prior year, partially offset by an increase in foreign exchange loss of $0.5 million and increase of interest expense of $0.1 million.

A one-time gain of $465k occurred in fiscal year 2021, which was a purchase price adjustment of a subsidiary (Modcomp GmbH) that was sold in fiscal year 2018.

This is classified as discontinued operations.

There are no further amounts to be received in connection with the purchase agreement from the original sale.

The Company recorded an income tax provision of approximately $444 thousand, which reflected an effective tax rate of 39%, for the year ended September 30, 2021.

The provision is primarily driven by the recording of a partial valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized, partially offset by current year federal R&D credits and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34.0%.

We identified an immaterial error in the first three quarters of fiscal year 2020 related to the recognition of certain revenue as “net,” when in fact the revenue should have been recorded on as “gross” basis.

We revised the first three quarters of fiscal year 2020 for this error, which increased total sales and total cost of sales on the Consolidated Statements of Operations for these periods.

The revision did not affect total gross profit, net income, or earnings per share.

There were no effects on the Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

A summary of revisions for our previously reported financial statements are disclosed within this Form 10-K under Note 20.

The provision is primarily driven by the recording of a full valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by the exclusion of income from the forgiveness of Paycheck Protection Program loans, the exclusion of the gain of the discontinued German entity under UK tax law, current year federal research and development credits, and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.

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

8 unchanged sentences

Operating loss

Loss before income taxes

Income tax expense (benefit)

Other income, (expense) net

Income (loss) before income taxes

Income tax expense

Net income (loss) from continuing operations

Gain on sale of discontinued operations

Net income (loss)

Revenue decreased by approximately $12.6 million, or 20%, to $49.2 million for the fiscal year ended September 30, 2021 versus $61.8 million for the fiscal year ended September 30, 2020.

Our TS segment revenue decreased by approximately $15.2 million, or 21%, consisting of a decrease of $11.3 million in our U.S.

division combined with a decrease of $3.9 million in our U.K.

Our HPP segment revenue decreased by approximately $2.0 million, or 26%, primarily due to decreased product revenue of $3.0 million, partially offset by increased service revenue of $1.0 million.

Our TS segment revenue decreased by approximately $11.3 million consisting of a decrease of $11.9 million in our U.S.

division, partially offset by an increase of $0.6 million in our U.K.

Our HPP segment revenue decreased by approximately $1.3 million, or 21%, primarily due to decreased product revenue of $0.3 million combined with decreased service revenue of $1.0 million.

TS segment revenue changes by products and services for the fiscal years ended September 30 were as follows:

Increase (decrease)

(Dollar amounts in thousands)

The decrease in TS segment product revenue of $15.0 million during the period was the result of an $11.0 million decrease in the U.S.

division combined with a decrease of $4.0 million in the U.K.

The decrease in TS segment product revenue of $12.5 million during the period was the result of a $13.1 million decrease in the U.S.

division, partially offset by an increase of $0.6 million in the U.K.

Customers’ budgets have been cut or put on hold in the short term due to the pandemic leading to significantly decreased sales.

The decrease in our U.S.

division product revenue year over year was primarily associated with several major customers, partially offset by a significant increase with one customer.

The decrease in the U.K.

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

The decrease in TS segment service revenue of $0.2 million as compared to the prior year was due to a $0.3 million decrease in the U.S.

division, partially offset by a $0.1 million increase in the U.K.

division product revenue year over year was primarily associated with several major customers, partially offset by a significant increase with several other customers.

The increase in the U.K.

division year over year was primarily associated with an increase with one major customer.

The increase in TS segment service revenue of $1.2 million as compared to the prior year was due to a $1.2 million increase in the U.S.

In fiscal year 2021 as compared to the prior year, the U.S.

division had a decrease of $2.2 million in internal services and a decrease of $0.4 million from third party maintenance and services, partially offset by an increase of $2.4 million in managed services.

division had an increase of $1.4 million in third party maintenance and an increase of $0.8 million in managed services, partially offset by a decrease of $1.0 million in internal and third party services revenue.

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

Increase (decrease)

(Dollar amounts in thousands)

The decrease in HPP product revenue of $3.0 million in the fiscal year ended September 30, 2020 was primarily the result of an approximately $1.8 million decrease in Myricom product line shipments combined with a $1.2 million decrease in Multicomputer product line shipments for the fiscal year ended September 30, 2020 as compared to the fiscal year ended September 30, 2019.

The decrease in HPP product revenue of $0.3 million in the fiscal year ended September 30, 2021 was primarily the result of an approximately $0.6 million decrease in Myricom product line shipments, partially offset with a $0.3 million increase in Multicomputer product line shipments for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020.

This is primarily due to the pandemic affecting customers’ budgets.

The increase in HPP service revenue of approximately $1.0 million for the period was primarily the result of an approximately a $1.0 million increase in royalty revenues on high-speed processing boards related to the E2D program during the fiscal year ended September 30, 2020 as compared to the fiscal year ended September 30, 2019.

The decrease in HPP service revenue of approximately $1.0 million for the period was primarily the result of a $0.6 million decrease in royalty revenues on high-speed processing boards related to the E2D program combined with a $0.4 million decrease of Multicomputer repairs for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020.

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 $13.3 million decrease in the Americas revenue for the fiscal year ended September 30, 2020 as compared to the fiscal year ended September 30, 2019 was primarily due to decreased revenue by our TS segment of approximately $13.0 million consisting of a decrease of $10.9 million from the U.S.

division and a $2.1 million decrease from the U.K.

The $13.9 million decrease in the Americas revenue for the fiscal year ended September 30, 2021 as compared to the fiscal year ended September 30, 2020 was primarily due to decreased revenue by our TS segment of approximately $12.4 million attributable to the U.S.

division, combined with decreased sales by our HPP segment of approximately $1.5 million.

The $1.8 million decrease in Europe revenue for the fiscal year ended September 30, 2020 as compared to the prior year period was primarily due to decreased sales by our TS-UK division of approximately $1.4 million, a decrease in sales by our TS-US division of approximately $0.3 million, and a decrease in sales by our HPP segment of approximately $0.1 million.

The $2.2 million decrease in Asia revenue for the fiscal year ended September 30, 2020 as compared to the prior year period was primarily the result of decreased revenue by our HPP segment of $1.6 million combined with a $0.6 million decrease in our TS-U.K.

The $0.9 million increase in Europe revenue for the fiscal year ended September 30, 2021 as compared to the prior year period was primarily due to increased sales by our TS-UK division of approximately $0.6 million combined with an increase in sales by our TS-US division of approximately $0.3 million.

The $0.4 million increase in Asia revenue for the fiscal year ended September 30, 2021 as compared to the prior year period was primarily the result of increased revenue by our HPP segment of $0.2 million combined with a $0.2 million increase in our TS-U.S.

Gross Margins

Our gross margins ("GM") decreased by approximately $0.8 million to $17.2 million for fiscal year 2020 as compared to GM of $18.0 million for fiscal year 2019.

Our gross margin ("GM") decreased by approximately $1.1 million to $16.1 million for fiscal year 2021 as compared to GM of approximately $17.2 million for fiscal year 2020.

The GM as a percentage of revenue increased to 33% for fiscal year 2021 from 28% for fiscal year 2020.

The increase in GM as a percentage of revenue was primarily attributed to a higher percentage of service revenue relative to product revenue in the HPP segment and a large decrease in TS segment product revenue with significantly improved margins relative to a slight decrease in service revenue.

The improved margins are from large lower margin deals in fiscal year 2019 that did not reoccur in fiscal year 2020.

The increase in GM as a percentage of revenue was primarily attributed to a higher percentage of service revenue relative to product revenue in the TS segment and a significant increase in TS segment product GM as a percentage of revenue.

Additionally, the product mix, amount of net revenue recorded, and overall margin in products contributed to this increase from prior year.

The improved product GM margin as a percentage of revenue has been a focus in fiscal year 2021, particularly in the TS segment.

The following table summarizes GM changes by segment for fiscal years ended September 30:

5 unchanged sentences

The overall TS segment GM as a percentage of revenue increased to 30% in fiscal year 2021 from 24% in fiscal year 2020.

The increase in GM as a percentage of revenue was primarily attributed to a large relative decrease in TS segment product revenue compared to a slight decrease in service revenue in fiscal year 2020 as compared to the prior year.

The increase in GM as a percentage of revenue was primarily attributed to a large relative decrease in TS segment product revenue compared to a significant increase in service revenue in fiscal year 2020 from the prior year.

Additionally, both product and service GM as a percentage of revenue increased from prior year.

1 unchanged sentence

division of $0.8 million combined with a decrease in the U.K division of $0.1 million.

The $0.3 million increase in the TS segment service GM in fiscal year 2020 as compared to the prior year primarily resulted from increased GM as a percentage of revenue in the U.S.

division despite a slight decrease in service revenue.

The $0.8 million increase in the TS segment service GM in fiscal year 2021 as compared to the prior year primarily resulted from increased service revenue as well as a slight increase in GM as a percentage of revenue 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:

1 unchanged sentence

(Dollar amounts in thousands)

The overall HPP segment GM as a percentage of revenue increased to 62% in fiscal year 2020 from 52% in fiscal year 2019.

The 10% increase in GM as a percentage of sales in the HPP segment was primarily attributed to the impact of an increase of $1.0 million in high margin Multicomputer royalty revenues and decreased GM from product revenue as a result of decreased Multicomputer product revenue, which has a higher GM as a percentage of sales.

The GM as a percentage of sales from products decreased primarily due to product mix in fiscal year 2020 as compared to the prior year.

The overall HPP segment GM as a percentage of revenue decreased to 59% in fiscal year 2021 from 62% in fiscal year 2020.

The 3% decrease in GM as a percentage of sales in the HPP segment was primarily attributed to the impact of a decrease of $0.6 million in high margin Multicomputer royalty revenues, which is all GM.

The GM as a percentage of sales from products increased primarily due to product mix in fiscal year 2021 as compared to the prior year.

Engineering and Development Expenses

Our engineering and development expenses are only in our HPP segment.

These expenses remained relatively flat at $2.8 million for fiscal year 2020 as compared to fiscal year ended 2019.

These expenses had a slight increase of $0.1 million from $2.8 million in fiscal year 2020 to $2.9 million for fiscal year 2021.

Fiscal year 2021 and 2020 expenses were primarily for product engineering expenses incurred in connection with the development of the ARIA SDS cyber security products.

5 unchanged sentences

For fiscal year 2021 compared to fiscal year 2020, the TS segment SG&A spending decrease of approximately $1.0 million was primarily due to a decrease in variable compensation and salaries of $1.0 million and a decrease of $0.1 million for travel expense.

For fiscal year 2020 compared to fiscal year 2019, the HPP segment SG&A spending increase of $0.1 million was primarily attributed to increased employees in the sales department.

For fiscal year 2021 compared to fiscal year 2020, the HPP segment SG&A spending decrease of $0.1 million was primarily attributed to decreased headcount in the sales department.

Other Income/Expenses

7 unchanged sentences

Foreign exchange (loss) gain

Gain on debt forgiveness

Other income, net

Total other income (expense), net

The $22 thousand decrease to total other income (expense), net for the year ended September 30, 2020 as compared to the year ended September 30, 2019 is primarily driven by an increase of interest expense of $129 thousand and a decrease in foreign exchange gain of $159 thousand causing a foreign exchange loss of $2 thousand, partially offset by an increase in increase in interest income of $259 thousand.

The increase in interest income of $259 thousand is primarily related to agreements that have payment terms in excess of one year (see Note 2 Accounts and Long-Term Receivables) from the U.S.

division of the TS Segment.

The $1.7 million increase to total other income (expense), net for the year ended September 30, 2021 as compared to the prior year period is primarily driven by a gain on debt forgiveness of $2.2 million, partially offset by an increase in foreign exchange loss of $0.5 million.

division has significant bank accounts with U.S.

dollars and Euros.

In consolidation, U.S.

dollars and Euros are remeasured into the functional currency, British Pounds, of our U.K.

This non-cash remeasurement is included in foreign exchange gain or loss on the income statement and the foreign exchange loss is primarily from a U.S.

Dollar and Euro bank account.

The US dollar and Euro weakened relative to the British Pound when comparing the exchange rate as of September 30, 2021 to September 30, 2020, which caused the foreign exchange loss.

Interest income is primarily related to agreements that have payment terms in excess of one year (see Note 3 Accounts and Long-Term Receivable in Item 1 to this Annual Report on Form 10-K for details) from the TS-US segment as interest income recognized in each agreement decreases as principal payments are made.

The interest expense increase of $122 thousand for the year ended September 30, 2021 as compared to the prior year period is related to three new multi-year agreements with vendors in the TS U.S.

division in fiscal year 2021.

Payments on these agreements contain both principal and interest expense.

See Note 9 Accounts payable and accrued expenses, and Other noncurrent liabilities in Item 1 to this Annual Report on Form 10-K.

The other income increase of $97 thousand for the year ended September 30, 2021 as compared to the prior year period is primarily related to a nonrecurring rebate we received that originated several years ago, which we did not anticipate receiving.

The Company recorded an income tax provision of approximately $444 thousand, which reflected an effective tax rate of 39%, for the year ended September 30, 2021.

The provision is primarily driven by the recording of a full valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by the exclusion of income from the forgiveness of Paycheck Protection Program loans, the exclusion of the gain of the discontinued German entity under UK tax law, and current year federal R&D credits and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.

For the year ended September 30, 2020, the income tax provision was approximately $384 thousand, which reflected an effective tax rate of 36%.

The provision is primarily driven by the recording of a partial valuation allowance against US deferred tax assets that are not more-likely-than-not to be realized partially offset by current year federal R&D credits and the benefit resulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.

For the year ended September 30, 2019, the income tax benefit was approximately $71 thousand, which reflected an effective tax rate of 16.1%.

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

During the period ended September 30, 2021, management assessed the positive and negative evidence in the U.S.

operations, and concluded that it is more likely than not that a portion of its deferred tax assets as of September 30, 2020 will not be realized in light of recent results, the COVID-19 pandemic, and the resulting economic fallout.

In determining the amount of the valuation allowance to record, the Company considered taxable income in prior carryback years for U.S.

federal tax purposes and the reversal of existing taxable temporary differences as sources of taxable income against which a portion of its U.S.

deferred tax assets is benefitted.

The Company recorded a full valuation allowance against the remaining U.S.

deferred tax assets in excess of these sources of taxable income.

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.

operations, and concluded that it is more likely than not that the deferred tax assets as of September 30, 2021 will not be realized in light of recent results, the ongoing impacts of COVID-19, and the resulting economic fallout.

In assessing the realizability of deferred tax assets, we consider taxable income in prior carryback years, as permitted under the tax law, our forecasted taxable earnings, tax planning strategies, and the expected timing of the reversal of temporary differences.

This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information and is performed on a jurisdiction-by-jurisdiction basis.

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

1 unchanged sentence

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.

Gain on Discontinued Operations

CSPi sold all stock of Modcomp GmbH to Reply AG on July 31, 2018 for $14.4 million cash and a gain of $18.1 million.

This sale was recorded in fiscal year 2018.

An additional €400 thousand was included in escrow as part of the Share Purchase and Assignment Agreement to potentially be received later as a purchase price adjustment in fiscal year 2021.

This amount was received in July 2021 and recorded as a gain from discontinued operations in the Consolidated Statements of Operations.

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

There are no other amounts that will be received as part of the agreement.

Liquidity and Capital Resources

Our primary source of liquidity is our cash and cash equivalents, which increased by approximately $0.7 million to $20.0 million as of September 30, 2021 from $19.3 million as of September 30, 2020.

Significant sources of cash for the year ended September 30, 2020 included proceeds from debt of $4.2 million including a $0.8 million and $1.4 million at CSP Inc.

and Modcomp, Inc., respectively, under the Payroll Protection Program (see details below), a decrease in accounts and long-term receivable of $3.4 million, a decrease in other assets of $2.1 million, and a decrease in inventories of $2.1 million.

Partially offsetting these significant sources of cash for the year ended September 30, 2020 were a decrease in accounts payable and accrued expenses of $8.0 million, dividends paid of $1.3 million, repayments on debt of $1.1 million, and net payments under line-of-credit agreement of $0.9 million.

On April 17, 2020, CSP, Inc.

and Modcomp, Inc., its wholly owned subsidiary (collectively, the “Borrowers”) each received a loan in the form of a promissory note from Paragon Bank (“Lender”) in the amounts of $827,000 and $1,353,600, respectively (the “SBA Loans”) under the Paycheck Protection Program, which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S.

Small Business Administration (“SBA”).

The SBA Loans have a two-year term and carry an annual fixed interest rate of 1%.

Under the Paycheck Protection Program, the SBA Loans provide for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, materially false or misleading representations to Lender or SBA, and adverse changes in the financial condition or business operations that Lender believes may materially affect Borrowers’ ability to pay the SBA Loans.

The Borrowers did not provide any collateral or guarantees for the SBA Loans and the Borrowers may prepay the principal of the SBA Loans at any time without penalty.

The Borrowers applied to the Lender for forgiveness of an amount due on the SBA Loans in an amount equal to the sum of certain costs during the 24-week period beginning on the date of the first disbursement of the SBA Loans.

Subsequent to September 30, 2020 and as of the date of this filing, we have received notice of forgiveness from the SBA for the SBA Loans.

C ash held by our foreign subsidiary in the United Kingdom totaled approximately $9.9 million as of September 30, 2020, which consists of 0.8 million euros, 0.3 million British Pounds, and 8.5 million U.S.

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

There were $1.5 million Euros converted to U.S.

Dollars during the year ended September 30, 2020.

As of September 30, 2020 and September 30, 2019, the Company maintained an inventory line of credit with a borrowing capacity of $15.0 million and $20.0 million, respectively.

It may be used by the TS or HPP segment in the

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

No interest accrues under the inventory line of credit when advances are paid within terms, however, late payments are subject to an interest charge published in the Wall Street Journal as the “prime rate” plus 5%.

The prime rate was 3.25% as of September 30, 2020.

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, 2020 and September 30, 2019, Company borrowings, all from the TS segment, under the inventory line of credit were $1.6 million and $2.5 million, respectively, and the Company was in compliance with all covenants.

As of September 30, 2020 and September 30, 2019, this line of credit also included availability of a limited cash withdrawal of up to $1.0 million and $1.5 million, respectively.

Our significant sources of cash for the year ended September 30, 2021 are primarily related to the $1.5 million net change between a increase in accounts receivable and long-term receivable of $9.3 million netted with an increase of $10.8 million in accounts payable and accrued expenses, and other-long-term liabilities.

We have multi-year agreements on both the receivables (including long-term) and payables (long-term portion in other long-term liabilities).

During fiscal year 2021 we entered into agreements with customers, which contained a significant financing component totaling payments of $16.7 million including interest due to the Company over the next four years.

It was determined we were acting as the agent in the transactions and recorded net revenue of approximately $0.9 million during fiscal year 2021

from these contracts.

For some of these agreements, we entered into agreements with vendors to pay for product over the next 4 years.

These payments totaled $9.2 million including interest.

Additionally, deferred revenue increased $0.9 million primarily due to a large upfront payment we received for one managed services contract.

Our significant uses of cash for the year ended September 30, 2021 included repayments on debt of $0.8 million, net payments under the line-of-credit agreement of $0.6 million, and principal payments on finance leases of $0.3 million.

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $10.0 million as of September 30, 2021, which consisted of 0.5 million Euros, 0.2 million British Pounds, and 9.2 million U.S.

This cash is included in our total cash and cash equivalents reported within our financial statements.

Due to the large pension obligation in the U.K., we maintain a large balance of cash in the U.K., most of the cash is from the sale of Modcomp GmbH in fiscal year 2018.

As of September 30, 2021 and September 30, 2020, the Company maintained a line of credit with a capacity of up to $15.0 million for inventory accessible to both the HPP and TS segments.

This line of credit also includes availability of a limited cash withdrawal of up to $1.0 million.

An amount of $14.1 million and $13.4 million were available as of September 30, 2021 and September 30, 2020, respectively.

As of September 30, 2021 and September 30, 2020 there were no cash withdrawals outstanding.

The amount of the inventory line of credit and cash withdrawal was lowered to $15.0 million in September of 2020 primarily due to lack of need for full use of the line.

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

For a further discussion of the Company’s line of credit, including its financial covenants, see Item 1, Note 12 Line of Credit.

On April 17, 2020, the Company and Modcomp, Inc., its wholly owned subsidiary each received a loan (“SBA Loans”) in the form of a promissory note from Paragon Bank in the amounts of $827,000 and $1,353,600, respectively under the Paycheck Protection Program, which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S.

Small Business Administration.

The SBA loans had a two-year term and carried an annual fixed interest rate of 1%.

The SBA Loans were forgiven in full by the SBA in the first quarter of fiscal year 2021.

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

Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash received from the SBA loans, the cash generated from operations, and availability on our line of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least 12 months from the date of this filing.

Critical Accounting Estimates and 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.

4 unchanged sentences

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, intangibles, and pension and retirement plans.

revenue recognition, valuation allowances, specifically the

allowance for doubtful accounts and net deferred tax asset valuation allowance, inventory valuation, intangibles, and pension and retirement plans.

Revenue Recognition

On October 1, 2018 the Company adopted Accounting ASU No.

2014-09, Revenue from Contracts with Customers (ASC 606) , 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.

The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied.

The standard also requires new, expanded disclosures regarding revenue recognition.

The ASU replaces most existing revenue recognition guidance in GAAP.

See Note 1 Summary of Significant Accounting Policies , in the Consolidated Financial Statements for additional information regarding our revenue recognition policies.

2 unchanged sentences

A financing component exists when at contract inception the period between the transfer of a promised good and/or service to the customer differs from when the customer pays for the good and/or service.

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.

As a practical expedient, we have 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.

Certain contracts contain a financing component including managed services contracts with financing of hardware and software.

3 unchanged sentences

The non-lease components are subject to ASC 606, Revenue from Contracts with Customers .

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

When product and non-managed services are sold together, the allocation of the transaction price to each performance obligation is calculated based on the estimated relative selling price or a budgeted cost-plus margin approach, as appropriate.

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.

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

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

1 unchanged sentence

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.

Only the hours that depict our performance toward satisfying a performance obligation are used to measure progress.

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

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

Gross versus Net Revenue

We recognize revenue from third-party service contracts as either gross sales or net sales, when the Company has fulfilled its obligation under its purchase order or contract 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 of the goods/services.

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.

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

We are a principal if we control the good or service before that good or service is transferred to the customer.

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

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 sales.

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 sale is complete.

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

When we are an agent, revenue is typically recorded at a point in time.

When we are the principal, revenue is recognized over the contract term.

We have concluded we are the agent in sales of third-party maintenance, software or hardware support, and certain security software that is sold with integral third-party delivered software maintenance that include critical updates.

Product Warranty Accrual

26 unchanged sentences

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.

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.

27 unchanged sentences

Management does not believe that inflation and changing prices had significant impact on sales, revenues or income during fiscal years 2021 or 2020.

However, we have seen a trend of significantly increasing prices, specifically with integrated circuit vendors.

We try to pass these price increases to our customers, but certain economic factors and technological advances have placed downward pressure on pricing.

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 7. Management’s Discussion and Analysis