What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-12-20 compared with 2023-12-13 · 95 added, 97 removed, 186 unchanged (51% of the section changed)

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Recent trends affecting our financial performance

As of September 30, 2023, the Russian/Ukrainian military conflict and the Israeli-Hamas conflict has not had a direct significant impact on revenue as we do not have any recurring customers in either region.

However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of both conflicts and geopolitical tensions related to such conflicts could adversely affect our business, financial condition and results of operations, by among other things, cyber attacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets.

As of September 30, 2024, the Russian/Ukrainian military conflict and the Israeli-Hamas conflict have not had a direct significant impact on revenue as we do not have any significant recurring customers in either region.

However, we do have customers and suppliers in surrounding regions which may be affected and further escalation of both conflicts and geopolitical tensions related to such conflicts could adversely affect our business, financial condition and results of operations, by among other things, cyberattacks, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets.

It is not possible at this time to predict the size of the impact or consequences of the conflicts on the Company and our customers or suppliers.

Overview of Fiscal 2024 Results of Operations

Revenue increased by approximately $10.2 million, or 19%, to $64.6 million for the fiscal year ended September 30, 2023 versus $54.4 million for the fiscal year ended September 30, 2022.

Gross profit margin percentage decreased slightly to 34% for the fiscal year ended September 30, 2023 from 35% of revenues for the fiscal year ended September 30, 2022.

We generated an operating income of $1.8 million for the fiscal year ended September 30, 2023 as compared to an operating loss of $(40) thousand for the fiscal year ended September 30, 2022.

Revenue decreased by approximately $9.4 million, or 15%, to $55.2 million for the fiscal year ended September 30, 2024 compared to $64.6 million for the fiscal year ended September 30, 2023.

Gross profit margin percentage remained consistent at 34% for the fiscal year ended September 30, 2024 and 2023.

We generated an operating loss of $(1.9) million for the fiscal year ended September 30, 2024 as compared to operating income of $1.9 million for the fiscal year ended September 30, 2023.

Other income, net was $1.5 million for the fiscal year ended September 30, 2024 as compared to $2.9 million for the prior year.

The Company recorded an income tax benefit of $(469) thousand, which reflected an effective tax rate of (9.9)%, for the fiscal year ended September 30, 2023 compared to an income tax provision of $50 thousand, which reflected an effective tax rate of 2.6% for the fiscal year ended September 30, 2022.

The Company recorded an income tax benefit of $(93) thousand, which reflected an effective tax rate of 22.2%, for the fiscal year ended September 30, 2024 compared to an income tax benefit of $(469) thousand, which reflected an effective tax rate of (9.9)% for the fiscal year ended September 30, 2023.

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

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Total costs and expenses

Operating income (loss)

Operating (loss) income

Other income, net

Income before income taxes

Income tax (benefit) expense

Revenue increased by approximately $10.2 million, or approximately 19%, to $64.6 million for the fiscal year ended September 30, 2023 versus $54.4 million for the fiscal year ended September 30, 2022.

(Loss) income before income taxes

Income tax benefit

Net (loss) income

Revenue decreased by approximately $9.4 million, or approximately 15%, to $55.2 million for the fiscal year ended September 30, 2024 compared to $64.6 million for the fiscal year ended September 30, 2023.

TS segment revenue changes by products and services for the fiscal years ended September 30, 2024 and 2023 were as follows:

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(Dollar amounts in thousands)

Our TS segment revenue increased by approximately $7.3 million consisting of an increase of $7.1 million in our U.S.

division combined with an increase of $0.2 million in our U.K.

The increase in TS segment product revenue of $7.5 million during the period was the result of a $7.3 million increase in the U.S.

division combined with an increase of $0.2 million in the U.K.

As the economic environment returns to pre-pandemic levels it has led to customers’ budgets not being as constrained as prior year leading to increased sales in the U.S.

division and U.K.

Additionally, there have been less shortages with suppliers causing less delays and our backlog has significantly decreased from the prior year.

The increase in our U.S.

division product revenue year over year was primarily associated with several major customers, partially offset by a decrease 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 decrease in TS segment service revenue of $0.2 million as compared to the prior year was in the U.S.

Our TS segment revenue decreased by approximately $6.7 million consisting of a decrease of $6.6 million in our U.S.

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

The decrease in TS segment product revenue of $7.5 million during the period was the result of a $7.4 million decrease in the U.S.

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

Interest rates were relatively high compared to prior years in fiscal year 2024 along with inflation which caused economic uncertainty and some reduced customer spending on products.

The decrease in our U.S.

division product revenue year over year was primarily associated with several existing major customers, partially offset by an increase with several new major customers and existing customers.

The decrease in the U.K.

division year over year was primarily associated with two major customers.

The increase in TS segment service revenue of $0.8 million as compared to the prior year was in the U.S.

In fiscal year 2024 as compared to the prior year, the U.S.

division had a decrease of $0.9 million in internal services and a decrease of $0.7 million in third party maintenance revenue, partially offset by an increase of $1.4 million in managed services.

division had an increase of $1.1 million in third party maintenance revenue, an increase of $0.4 million in managed services, partially offset by a decrease of $0.7 million in internal services.

HPP segment revenue changes by product and services for the fiscal years ended September 30, 2024 and 2023 were as follows:

September 30,

Increase (decrease)

(Dollar amounts in thousands)

Our HPP segment revenue increased by approximately $3.0 million or 79%.

The increase in HPP product revenue of $3.0 million in the fiscal year ended September 30, 2023 was primarily the result of two major non-recurring transactions of $1.8 million and $1.2 million for the fiscal year ended September 30, 2023 as compared to the fiscal year ended September 30, 2022.

The increase in HPP service revenue of approximately $0.1 million for the fiscal year ended September 30, 2023 was primarily the result of a $0.4 million increase in AIRA revenue, partially offset with a decrease of $0.3 million in royalty revenues on high-speed processing boards related to the E2D program as compared to the fiscal year ended September 30, 2022.

Our HPP segment revenue decreased by approximately $2.7 million or 40%.

The decrease in HPP product revenue of $2.9 million in the fiscal year ended September 30, 2024 was primarily the result of two major non-recurring transactions of $1.8 million and $1.2 million in the prior year along with several other customers, partially offset by one major AZT sale in fiscal year 2024.

The increase in HPP service revenue of approximately $0.2 million for the fiscal year ended September 30, 2024 was primarily the result of a $0.5 million increase in ARIA revenue, partially offset with a decrease of $0.3 million in royalty revenues on high-speed processing boards related to the E2D program as compared to the fiscal year ended September 30, 2023.

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

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(Dollar amounts in thousands)

The $10.3 million increase in the Americas revenue for the fiscal year ended September 30, 2023 as compared to the fiscal year ended September 30, 2022 was primarily due to increased revenue by our TS-US division of approximately $7.3 million combined with an increase of $3.0 million attributable to the HPP segment.

Sales to Europe remained relatively flat with an increase of $0.1 million in the TS-US division, offset with a decrease in the TS-UK division of $0.1 million.

Sales to Asia remained relatively flat with no significant changes in any division.

The $9.5 million decrease in the Americas revenue for the fiscal year ended September 30, 2024 as compared to the fiscal year ended September 30, 2023 was primarily due to decreased revenue by our TS-US division of $7.0 million, decreased revenue by our TS-UK division of $0.1 million, and decreased revenue by our HPP segment of $2.4 million.

Sales to Europe decreased by $0.3 million primarily due to a decrease by our HPP segment of $0.3 million.

Sales to Europe in the TS segment remained flat with an increase in the TS-US division of $0.1 million, offset with a decrease in the TS-UK division of $0.1 million.

Sales to Asia-Pacific increased $0.4 million due to the TS-US division.

Gross Margins

Our gross margin ("GM") increased by $3.1 million to $21.9 million for fiscal year 2023 as compared to GM of approximately $18.8 million for fiscal year 2022.

The total GM as a percentage of revenue decreased to 34% for fiscal year 2023 from 35% for fiscal year 2022.

Our gross margin ("GM") decreased by $3.1 million to $18.9 million for fiscal year 2024 as compared to GM of approximately $21.9 million for fiscal year 2023.

The total GM as a percentage of revenue remained flat at 34% for fiscal year 2024 and 2023.

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

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(Dollar amounts in thousands)

The overall TS segment GM as a percentage of revenue decreased to 31% in fiscal year 2023 from 33% in fiscal year 2022.

The $1.4 million GM increase in our TS segment product GM in fiscal year 2023 as compared to the prior year resulted from an increase in the U.S.

Product GM as a percentage of revenue remained relatively flat for fiscal year 2023 compared to fiscal year 2022 with no significant changes in any specific type of product.

The $0.6 million decrease in our TS segment service GM in fiscal year 2023 as compared to the prior year resulted from a decrease in GM in the U.S.

Service GM as a percentage of revenue decreased to 59% in fiscal year 2023 from 62% in fiscal year 2022 due to decreased third party maintenance revenue as discussed above, which is recorded as net sales meaning all the gross margin is recorded in the services revenue financial statement line item causing increased GM as a percentage of revenue.

The overall TS segment GM as a percentage of revenue increased to 32% in fiscal year 2024 from 31% in fiscal year 2023.

The $2.1 million product GM decrease in fiscal year 2024 as compared to the prior year resulted from a decrease in the U.S.

Product GM as a percentage of revenue decreased 2% for fiscal year 2024 compared to the prior year due to product mix.

The $0.6 million increase in our TS segment service GM in fiscal year 2024 as compared to the prior year resulted from an increase in GM in the U.S.

Service GM as a percentage of revenue remained flat at 59% in fiscal year 2024 due to increased third party maintenance revenue, which is recorded as net sales meaning all the gross margin is recorded in the services revenue financial statement line item causing increased GM as a percentage of revenue, offset by decreased GM from internal services which have associated fixed costs which decreased the GM as a percentage of revenue.

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

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The overall HPP segment GM as a percentage of revenue increased to 65% in fiscal year 2024 from 62% in fiscal year 2023.

The GM as a percentage of sales from products increased 28% primarily due to two major non-recurring transactions in fiscal year 2023 when compared to fiscal year 2022 as discussed above.

The GM as a percentage of sales from services decreased 21% primarily due to a relatively significant decrease of high margin Multicomputer royalty revenues, which is nearly all GM and recorded as service revenue.

The GM as a percentage of sales from products increased 9% primarily due to the large ARIA AZT sale which was nearly all GM.

The GM as a percentage of sales from services decreased 5% primarily due to decreased Multicomputer royalty revenues, which is nearly all GM and recorded as service revenue.

Engineering and Development Expenses

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

These expenses remained relatively flat at $3.1 million for fiscal year 2023 and $3.1 million for fiscal year 2022.

There were increased consulting expenses of $0.4 million, offset by decreased labor expenses of $0.4 million of labor expenses in fiscal year 2023 when compared to fiscal year 2022.

Fiscal year 2023 and 2022 expenses were primarily for product engineering expenses incurred in connection with the development of the ARIA SDS cyber security products and ARIA Zero Trust (AZT).

These expenses decreased $0.1 million to $3.0 million for fiscal year 2024 from $3.1 million for fiscal year 2023.

This was primarily due to decreased labor expenses of $0.2 million in fiscal year 2024 when compared to fiscal year 2023, partially offset by increased stock compensation of $0.1 million.

Fiscal year 2024 and 2023 expenses were primarily for product engineering expenses incurred in connection with the further development of the ARIA Zero Trust (AZT) and ARIA SDS cyber security products.

Selling, General and Administrative

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By Operating Segment:

The TS segment SG&A spending increase of approximately $1.1 million for the fiscal year ended September 30, 2023 when compared to the prior year was primarily due to an increase in salaries of $0.6 million, an increase in variable compensation of $0.3 million, and an increase in travel expenses of $0.2 million.

The HPP segment SG&A spending increase of $0.1 million for the fiscal year ended September 30, 2023 when compared to the prior year was primarily attributed to increased variable compensation.

The TS segment SG&A expenses increased approximately $0.1 million for the fiscal year ended September 30, 2024 when compared to the prior year.

This increase was primarily due to an increase in audit and tax fees of $0.3 million, an increase in stock compensation expense of $0.2 million, an increase in actuarial fees of $0.2 million in connection to preparing to sell the pension in the TS-UK division, partially offset with decreased variable compensation of $0.3 million and decreased bonus of $0.3 million.

The HPP segment SG&A expense increase of $0.8 million for the fiscal year ended September 30, 2024 when compared to the prior year was primarily attributed to increased consulting of $0.4 million, increased professional services of $0.2 million, increased selling including travel and events of $0.2 million, increased stock compensation of $0.1 million, increased recruiting of $0.1 million, partially offset by decreased bonuses of $0.2 million.

Other Income/Expenses

The following table details our other income (expense) for the years ended September 30, 2024 and 2023:

Twelve months

September 30, 2024

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(Amounts in thousands)

Foreign exchange (loss) gain

Foreign exchange loss

Interest expense

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Employee Retention Tax Credit, net of costs to collect

Other income (expense), net

Other income, net

Total other income, net

For the year ended September 30, 2024 the foreign exchange loss decreased $0.1 million primarily due to the U.S.

dollar significantly weakening against the British pound in fiscal year 2023 compared to the prior year where it significantly strengthened.

dollar weakening less against the British pound in fiscal year 2024 compared to the prior year.

division has bank accounts with U.S.

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Dollar and Euro bank account.

Dollar bank account consists of approximately 95% of the non-British Pound currency held in the U.K.

Interest expense decreased $98 thousand for the year ended September 30, 2023 as compared to the prior year period is due to less interest expense on loans on whole life insurance policies on officers as $0.9 million was paid back in fiscal year 2022 causing less interest to be incurred in fiscal year 2023.

Additionally, there was decreased interest expense related to multi-year agreements with vendors in the TS U.S.

Dollar bank account consists of approximately 87% of the currency held in the U.K.

subsidiary after remeasurement into U.S.

Interest expense decreased $27 thousand for the year ended September 30, 2024 compared to the prior year period primarily due to less interest expense related to multi-year agreements with vendors in the TS U.S.

Payments on these agreements contain both principal and interest expense.

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Interest income increased $0.6 million for the year ended September 30, 2024 when compared to the prior year.

Interest income is primarily related to agreements that have payment terms in excess of one year (see Note 2 Accounts and Long-Term Receivable in Item 1 to this Annual Report on Form 10-K for details) from the TS-US segment.

There were three new agreements in fiscal year 2023, which caused an increase in interest income.

Additionally, interest income from

cash and cash equivalents increased significantly from prior year due to substantially increased interest rates during fiscal year 2023.

Interest income from cash and cash equivalents in fiscal year 2024 increased $0.7 million from prior year due to a significantly higher average balance during fiscal year 2024 earning interest income, partially offset by decreased interest income from multi-year agreements of $0.1 million.

These agreements have payment terms in excess of one year (see Note 3 Financing Receivables, net in Item 1 to this Annual Report on Form 10-K for details) and are only in the TS-US segment.

The Employee Retention Tax Credit, net of costs to collect of $2.1 million was recognized in the fourth quarter of fiscal year 2023.

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There are no other amounts that will be received related to this credit.

The other income increase of $115 thousand for the year ended September 30, 2023 as compared to the prior year period is primarily related to a vendor settlement related to one specific agreement.

The Company recorded an income tax benefit of $(469) thousand, which reflected an effective tax rate of (9.9)%, for the fiscal year ended September 30, 2023.

The provision is primarily driven by the benefit recognized as a result of the release of the valuation allowance against the majority of the Company's deferred tax assets.

The benefit recorded during the fiscal year equaled $1.8 million for valuation allowances released on deferred tax assets related to prior years.

The Company also claimed and received the Employee Retention Credit.

For the fiscal year ended September 30, 2022, the income tax provision was approximately $50 thousand, which reflected an effective tax rate of 2.6%.

The provision is primarily driven by the state tax expense.

The Company recorded an income tax benefit of $(93) thousand, which reflected an effective tax rate of 22.2%, for the year ended September 30, 2024.

The provision is primarily driven by the benefit recognized as a result of windfalls for restricted stock awards that vested during the period, offset by the change in valuation allowance.

The benefit recorded during the fiscal year was $189 thousand for the windfall on restricted stock awards vesting during the period and an expense of $180 thousand for the change in valuation allowances against deferred tax assets.

For the year ended September 30, 2023, the income tax benefit was approximately $(469) thousand, which reflected an effective tax rate of a (9.9)% benefit.

The provision was primarily driven by the benefit recognized as a result of the release of the valuation allowance against the majority of the Company's deferred tax assets.

The benefit recorded during the fiscal year was $1.8 million for valuation allowances released on deferred tax assets related to prior years.

The Company also claimed and received the Employee Retention Credit, which resulted in a net benefit of approximately $134 thousand, after amending prior year returns.

The Company undertakes a review of its valuation allowance at each financial statement period, reviewing the positive and negative evidence to help determine whether it is more likely than not that the Company will realize the future tax benefits from its deferred tax balances.

In the year ended September 30, 2020, the Company established a partial valuation allowance against its deferred tax assets in light of results at the time, the COVID-19 pandemic, and the resulting economic fallout, and established a full valuation during the year ended September 30, 2021.

Since that time, the COVID-19 pandemic has ended, and the Company’s Technology Solutions business has grown its revenue and operating income in fiscal years 2023 and 2022.

As a result, the Company has determined that it is more likely than not that substantially all of its net deferred tax assets in the U.S.

The Company has determined that it is more likely than not that substantially all of its net deferred tax assets in the U.S.

jurisdiction will be utilized and that associated valuation allowances should be reversed during year ended September 30, 2024.

The valuation reversed during the period resulted in a $1.8 million benefit.

The Company separately analyzed the realizability of its federal and state credits and determined $796 thousand (net of federal benefit) of state credits are expected to expire unutilized and kept a valuation allowance against these credits.

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The following is a summary of our cash flows for the fiscal year ended September 30, 2024 and 2023:

For the Year ended September 30,

(Dollar amounts in thousands)

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Cash provided by operating activities was $4.2 million for the year ended September 30, 2024 compared to $3.9 million for the prior year.

The increase from prior year is primarily related to increased net income including recognizing $2.1 million from the Employee Retention Tax Credit, net of costs to collect in fiscal year 2023.

Additionally, an amount of $0.9 million was paid back on insurance policy loans in the prior year, but did not recur this year.

The remaining differences are primarily related to timing differences in operating assets and liabilities.

The increase from prior year is primarily related the change in Accounts payable and accrued expense payments of $13.0 million as a large payment run at the end of fiscal year 2023 when in fiscal year 2024 there was not and a decrease in pension and retirement plan liabilities of $0.4 million.

The primary decreases include a decrease of net income (loss) change of $5.5 million, a decrease of $4.9 million in other assets, and a decrease of $2.7 million in accounts receivable.

The remaining differences are related to timing differences in operating assets and liabilities.

Investing Activities

Cash used in investing activities was $341 thousand for the year ended September 30, 2023 compared to $20 thousand provided by investing activities for the prior year.

The decrease from the prior year is primarily related to $322 thousand we received in the prior year for proceeds from a corporate life insurance policy.

Cash used in investing activities was $258 thousand for the year ended September 30, 2024 compared to $341 thousand used in investing activities for the prior year.

The decrease from the prior year is primarily related to less additions of intangible assets and less purchases of property, equipment, and improvements during fiscal year 2024 when compared to the prior fiscal year.

Financing Activities

Cash used in financing activities was $2.4 million for the year ended September 30, 2023 compared to $1.3 million provided by financing activities for the prior year.

The primary difference was the timing in the net borrowing on the line-of-credit, which for the year ended September 30, 2023 we had a net payment of $1.6 million compared to a net borrowing of $2.2 million in the prior year.

We paid dividends of $0.7 million for the year ended September 30, 2023 compared to $0.1 million in the prior year.

The dividend was suspended during fiscal year 2020 due to uncertainty from COVID-19 but was reinstated during the fourth quarter of fiscal year 2022 at $0.03 per share.

The dividend was increased to $0.04 per share in the third quarter of fiscal year 2023.

Repayments on notes payable for the year ended September 30, 2023 were $0.4 million compared to $0.7 million in the prior year.

There was only one note payable outstanding during fiscal year 2023 compared to two in fiscal year 2022.

Cash provided by financing activities was $1.4 million for the year ended September 30, 2024 compared to $2.4 million used in financing activities for the prior year.

The primary difference was the timing in the net borrowing on the line-of-credit, which for the year ended September 30, 2024 we had a net borrowing of $2.7 million compared to a net payment of $1.6 million in the prior year.

Additionally, in fiscal year 2024 there were increased cash dividends paid by $0.4 million and increased treasury stock repurchases of $0.1 million compared to the prior fiscal year.

Other Liquidity and Capital Resources Items

Our cash held by our foreign subsidiary in the United Kingdom totaled approximately $4.8 million as of September 30, 2023, which consisted of 0.2 million Euros, 0.3 million British Pounds, and 4.3 million U.S.

Our cash held by our foreign subsidiary in the United Kingdom totaled the equivalent of approximately $5.4 million as of September 30, 2024, which consisted of 0.4 million Euros, 0.3 million British Pounds, and 4.7 million U.S.

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

Due to the pension obligation in the U.K., we maintain a large balance of cash in the U.K.

Subsequent to September 30, 2024, the U.K.

pension assets, excluding cash, were all converted into cash to sell the U.K.

pension obligation.

As of the date of this filing, there is an agreement to sell the pension obligation in full.

This agreement has many contingencies and the expected timeframe of the sale occurring is 4 to 16 months from the date of this filing.

As of September 30, 2024 and September 30, 2023, 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.

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

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

Not all multi-year receivable agreements have a corresponding payable multi-year agreement.

In fiscal year 2024 we are scheduled to receive $7.7 million related to the multi-year receivables and pay $1.7 million related to the payables.

Our last payment on the note payable as of September 30, 2023 is scheduled for payment of $0.4 million in fiscal year 2024.

A subsequent review of qualified wages for the Employee Retention Credit was performed during the preparation of the tax provision for fiscal year 2023 and it was determined $0.6 million of the money received did not qualify and needs to be paid back to the Internal Revenue Service (IRS).

The last note payable was paid in full in fiscal year 2024 of $0.4 million and no notes remain outstanding as of September 30, 2024.

There is a total of $3.8 million due to vendors with financing agreements outstanding as of September 30, 2024, including $2.3 million payments to be made that are current.

Each vendor financing agreement was related to a sale and has a related financing receivable.

There is a total of $7.3 million due to the Company of customer financing agreements outstanding as of September 30, 2024, including $4.3 million to be received that are current.

A subsequent review of qualified wages for the Employee Retention Credit was performed during the preparation of the tax provision for fiscal year 2023 and it was determined $0.6 million of the money received did not qualify and was paid back to the Internal Revenue Service (IRS) except for $11k, which is still owed to the IRS as of September 30, 2024.

This $0.6 million was included in Cash and cash equivalents as of September 30, 2023.

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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.

On an on-going basis, we evaluate our estimates, including those related to the inventory valuation, income taxes, deferred compensation, revenue recognition, retirement plans, 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.

1 unchanged sentence

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 net deferred tax asset valuation allowance, inventory valuation, and pension and retirement plans.

Revenue Recognition

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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,

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.

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.

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

For each identified performance obligation in a transaction, we evaluate the facts and circumstances present to determine whether or not we control the specified good or service prior to transfer to the customer.

This evaluation includes, but is not limited to, assessing indicators such as whether:

(i) we are primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) we have inventory risk before the specified good or service has been transferred to a customer and (iii) we have discretion in establishing the price for the specified good or service.

When the evaluation indicates we control the specified good or service prior to transfer to the customer, we are acting as a principal.

When the evaluation indicates we do not control the specified good or service prior to transfer to the customer, we are acting as an agent.

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

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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 includes critical updates.

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.

When CSPi sells goods and services with a financing component the strongest indicator is whether the Company has discretion in selling price as many of the agreements are brought to us at predetermined price by the manufacturer.

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.

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

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.

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.

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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.

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.

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.

2 unchanged sentences

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