What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-14 compared with 2021-03-31 · 545 added, 1071 removed, 346 unchanged (82% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF MANAGEMENT

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID:

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF MANAGEM ENT

The management of Communications Systems, Inc.

and its subsidiary

companies is responsible for the integrity and objectivity of the financial statements and other financial information contained

in the annual report.

The financial statements and related information were prepared in accordance with accounting principles generally

accepted in the United States of America and include amounts that are based on management’s informed judgments and estimates.

In fulfilling its responsibilities for the integrity of financial

information, management maintains accounting systems and related controls.

These controls provide reasonable assurance, at appropriate

costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements.

Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal

and corporate conduct.

The Audit and Finance Committee of the Board of Directors, comprised

solely of outside directors, meets with the independent auditors and management periodically to review accounting, auditing, financial

reporting and internal control matters.

The independent auditors have free access to this committee, without management present,

to discuss the results of their audit work and their opinion on the adequacy of internal financial controls and the quality of

financial reporting.

/s/ Anita Kumar

Chief Executive Officer

and its subsidiary companies is responsible for the integrity and objectivity of the financial statements and other financial information contained in the annual report.

The financial statements and related information were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s informed judgments and estimates.

In fulfilling its responsibilities for the integrity of financial information, management maintains accounting systems and related controls.

These controls provide reasonable assurance, at appropriate costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements.

Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct.

The Audit and Finance Committee of the Board of Directors, comprised solely of independent, non-employee directors, meets with the independent auditors and management periodically to review accounting, auditing, financial reporting and internal control matters.

The independent auditors have free access to this committee, without management present, to discuss the results of their audit work and their opinion on the adequacy of internal financial controls and the quality of financial reporting.

/s/ Roger H.D.

Interim Chief Executive Officer

Chief Financial Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the board of directors of Communications

Systems, Inc.:

REPORT OF INDEPENDENT REGISTERED PUBLIC AC COUNTING FIRM

To the shareholders and the board of directors of Communications Systems, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets

of Communications Systems, Inc.

and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated

statements of income (loss) and comprehensive income (loss), changes in stockholders’

equity, and cash flows, for each of

the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated

financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the

financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for

each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the

United States of America.

We have audited the accompanying consolidated balance sheets of Communications Systems, Inc.

and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income (loss) and comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based

on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor

were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to

obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness

of the Company’s internal control over financial reporting.

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks

of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that

respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in

the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates

made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our

audits provide a reasonable basis for our opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated

below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated

to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved

our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any

way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,

providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Intangible Assets Acquired

in Business Combinations

Critical Audit Matter

As described in Note 5 to

the consolidated financial statements, the Company completed the acquisitions of Ecessa Corporation and IVDesk Minnesota, Inc.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Intangible Assets Acquired in Business Combinations

Critical Audit Matter Description

As described in Note 5 to the consolidated financial statements, the Company completed the accounting for the acquisition of IVDesk Minnesota, Inc.

during the year ended December 31, 2021.

The aggregate consideration for the acquisitions was $6,010,000.

Both acquisitions were

accounted for as business combinations.

The Company measured the assets acquired and liabilities assumed at fair value, which resulted

in the recognition of intangible assets totaling $2,980,000, which consisted primarily of internally developed software of $1,800,000

and customer relationships of $1,010,000.

The Company has also recorded goodwill of $2,086,000 as a result of these acquisitions.

The valuation of the intangible

assets is complex and judgmental due to the use of subjective assumptions in the valuation models used by management when determining

the estimated fair values of the assets.

The determination of the fair values of the intangible assets requires management to make

significant estimates and assumptions related to forecasts of future revenues, expenses, discount rates, risk-free rates, weighted-average

cost of capital, equity risk premium, and royalty rates.

Auditing management’s

valuation of the acquired intangible assets is complex due to the judgments required to evaluate management’s previously

noted estimates and assumptions.

How We Addressed the Matter

The primary procedures we

performed to address this critical audit matter included:

■ Obtained an understanding of the design and implementation of internal controls relating to the evaluation of the assumptions

used to estimate the fair value of the intangible assets acquired, including controls addressing:

■ Management’s evaluation of the identification of the assets acquired.

■ Management’s evaluation of the completeness, accuracy and reasonableness of the prospective financial information used

to determine the fair values of assets acquired.

■ Management’s evaluation of the completeness and accuracy of key assumptions and inputs used by a third-party valuation

specialist, including discount rate, risk-free rate, weighted-average cost of capital, equity risk premium, and royalty rates used

to determine fair values.

■ Management’s evaluation of the clerical accuracy of the model used to determine the fair values of assets acquired.

■ Substantively tested, with the assistance of firm personnel with experience in the application of fair value and valuation

methodologies, the appropriateness of the judgments and assumptions used in management’s estimation process for determining

the fair value of the intangible assets acquired, including:

■ Tested the mathematical accuracy of the calculations performed along with assessing the completeness of the information used

in the calculations.

■ Evaluated the appropriateness of the valuation methodologies used, as well as the key assumptions and inputs used, including

discount rate, risk-free rate, weighted-average cost of capital, equity risk premium and royalty rates.

■ Performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes

in the assumptions.

■ Compared significant assumptions used by management to current industry and competitor data, historical results, third-party

market data and evidence obtained in other areas of the audit.

Assessment of Impairment of Long-Lived

Critical Audit

Matter Description

As described in Note 1 to

the consolidated financial statements, the Company reviews its long-lived assets periodically to determine whether indicators of

potential impairment exist.

Potential impairment is determined by comparing the carrying value of the assets with the expected

future cash flows to be provided by operating activities of the business or related asset groups.

If the sum of the expected future

net cash flows is less than the carrying value, an impairment loss would be measured by comparing the amount by which the carrying

value exceeds the fair value of the asset.

Management identified triggering events during the year ended December 31, 2020, that

indicated that long-lived assets could potentially be impaired, and performed an impairment test as of December 31, 2020.

While the impairment test

did not result in the recording of any impairment loss, the impairment test is complex and judgmental due to the use of subjective

assumptions used by management when determining the asset groups to be evaluated for impairment, estimating expected future cash

flows to be provided by operating activities of the identified asset groups, and estimating fair values of the assets or asset

groups when applicable.

Auditing management’s

impairment analysis is complex due to the judgments required to evaluate management’s forecasts of expected future cash flows

and estimated fair values when applicable.

How We Addressed the Matter

The primary procedures we

performed to address this critical audit matter included:

● Obtained an understanding of the design and implementation of internal controls relating to the evaluation of the assumptions

used by management in conducting its impairment analysis, including controls addressing:

■ Management’s evaluation of the asset groups evaluated for potential impairment.

■ Management’s evaluation of the accuracy and reasonableness of the net cash flows expected to be provided by operating

activities of the asset groups.

■ Management’s evaluation of the completeness and accuracy of information used to determine fair values of assets or asset

groups, including the methodologies used to determine fair values, when applicable.

● Substantively tested the appropriateness of the judgments and assumptions used by management in conducting its impairment analysis,

■ Confirmed the appropriateness of the asset groups evaluated in performing management’s impairment analysis.

■ Tested management’s assumptions used in estimating the net cash flows expected to be provided by operating activities

of the asset groups, including the completeness and accuracy of the underlying data supporting the assumptions.

■ Utilized an internal valuation specialist to assist in testing the Company’s valuation model and significant assumptions

related to the fair value of certain long-lived assets.

■ Evaluated audit evidence from events and transactions occurring after the measurement date.

Goodwill Impairment Evaluation

Critical Audit

Matter Description

As described in Note 1 to

the consolidated financial statements, the Company tests goodwill for impairment annually, or more frequently if events have occurred

or circumstances exist that indicate the carrying amount of goodwill may not be recoverable.

Due to the presence of the triggering

events noted in the Assessment of Impairment of Long-Lived Assets critical audit matter, management performed an impairment test

for goodwill as of December 31, 2020.

The Company performed qualitative assessments to determine whether It was more likely than

not (that is, a likelihood of more than 50 percent) that the fair value of the reporting units were less than their carrying amounts,

including goodwill.

While the impairment test

did not result in the recording of any impairment loss, the identification of triggering events indicates potential impairment

of goodwill, which requires management to make significant judgments in performing its assessment including the evaluation of macroeconomic

conditions, industry and market conditions, cost factors, overall financial performance, other entity-specific events, events affecting

the reporting units, and trends in the Company’s share price.

Auditing management’s

impairment analysis is complex due to the judgments required to evaluate management’s assessment of those factors identified

How We Addressed the Matter

The primary procedures we

performed to address this critical audit matter included:

● Obtained an understanding of the design and implementation of internal controls relating to the evaluation of the assumptions

used by management in conducting its impairment analysis, including controls addressing:

■ Management’s assessment of identified triggering events indicating potential impairment.

■ Management’s evaluation of the reporting units evaluated for potential impairment.

■ Management’s assessment of qualitative factors that may indicate potential impairment of goodwill.

● Substantively tested the appropriateness of the judgments and assumptions used by management in conducting its impairment analysis,

■ Confirmed the appropriateness of the reporting units evaluated in performing management’s impairment analysis.

■ Evaluated the factors management considered in its qualitative assessment to determine that goodwill was not impaired, including

the evaluation of macroeconomic conditions, industry and market conditions, cost factors, the past financial performance of the

reporting units, the projected financial performance of the reporting units, other entity-specific events, events affecting the

reporting units, and trends in the Company’s share price.

The consideration for the acquisition was $1,368,000.

The acquisition was accounted for as a business combination.

The Company measured the assets acquired and liabilities assumed at fair value, which resulted in the recognition of an intangible asset totaling $720,000, which consisted of customer relationships.

The Company has also recorded goodwill of $745,000 as a result of this acquisition.

The valuation of the intangible assets is complex and judgmental due to the use of subjective assumptions in the valuation models used by management when determining the estimated fair values of the assets.

The determination of the fair values of the intangible assets requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses, discount rates, risk-free rates, weighted-average cost of capital, and equity risk premium.

Auditing management’s valuation of the acquired intangible assets is complex due to the judgments required to evaluate management’s previously noted estimates and assumptions.

How We Addressed the Matter in Our Audit

The primary procedures we performed to address this critical audit matter included:

 Obtained an understanding of the design and implementation of internal controls relating to the evaluation of the assumptions used to estimate the fair value of the intangible assets acquired, including controls addressing:

 Management’s evaluation of the identification of the assets acquired.

 Management’s evaluation of the completeness, accuracy and reasonableness of the prospective financial information used to determine the fair values of assets acquired.

 Management’s evaluation of the completeness and accuracy of key assumptions and inputs used by a third-party valuation specialist, including discount rate, risk-free rate, weighted-average cost of capital, and equity risk premium used to determine fair values.

 Management’s evaluation of the clerical accuracy of the model used to determine the fair values of assets acquired.

 Substantively tested, with the assistance of firm personnel with experience in the application of fair value and valuation methodologies, the appropriateness of the judgments and assumptions used in management’s estimation process for determining the fair value of the intangible assets acquired, including:

 Tested the mathematical accuracy of the calculations performed along with assessing the completeness of the information used in the calculations.

 Evaluated the appropriateness of the valuation methodologies used, as well as the key assumptions and inputs used, including cash flow projections, discount rate, risk-free rate, weighted-average cost of capital, and equity risk premium.

 Performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes in the assumptions.

 Compared significant assumptions used by management to current industry and competitor data, historical results, third-party market data and evidence obtained in other areas of the audit.

/s/ Baker Tilly US, LLP

(formerly known as Baker Tilly Virchow Krause, LLP)

We have served as the Company’s auditor since 2017.

We have served as the Company's auditor since 2017.

Minneapolis, Minnesota

1 unchanged sentence

COMMUNICATIONS SYSTEMS, INC.

AND SUBSIDIARIES

AND SUBSIDI ARIES

CONSOLIDATED BALANCE SHEETS

1 unchanged sentence

Cash and cash equivalents

Restricted cash

Trade accounts receivable, less allowance for doubtful accounts of $121,000 and $154,000, respectively

Trade accounts receivable, less allowance for

doubtful accounts of $ 52,000 and $ 14,000 , respectively

Inventories, net

Prepaid income taxes

4 unchanged sentences

OTHER ASSETS:

Deferred income taxes

Right of use asset

2 unchanged sentences

TOTAL OTHER ASSETS

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS'

CURRENT LIABILITIES:

12 unchanged sentences

Deferred revenue

Long term liabilities held for sale

TOTAL LONG-TERM LIABILITIES

COMMITMENTS AND CONTINGENCIES (Footnote 10)

STOCKHOLDERS’

STOCKHOLDERS'

Preferred stock, par value $ 1.00 per share;

3,000,000 shares authorized;

Common stock, par value $.05 per share;

Common stock, par value $.

05 per share;

30,000,000 shares authorized;

1 unchanged sentence

Additional paid-in capital

Retained earnings

(Accumulated deficit) retained earnings

( 28,349,336 )

Accumulated other comprehensive loss

TOTAL STOCKHOLDERS’

TOTAL LIABILITIES AND STOCKHOLDERS’

TOTAL STOCKHOLDERS'

TOTAL LIABILITIES AND STOCKHOLDERS'

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SUBSIDIARIES

AND SUB SIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

Ended December 31

Year Ended December 31

Cost of sales

1 unchanged sentence

Selling, general and administrative expenses

Acquisition costs

Amortization expense

Transaction costs

Impairment loss

Restructuring expense

Total operating expenses

Operating (loss) income from continuing operations

Operating loss from continuing operations

( 8,171,623 )

( 5,624,781 )

Other income (expenses):

Investment and other income

Gain (loss) on sale of assets

Gain on sale of assets

Interest and other expense

Other income, net

Operating (loss) income from continuing operations before income taxes

Income tax expense (benefit)

Net (loss) income from continuing operations

Operating loss from continuing operations before income taxes

( 8,153,859 )

( 4,692,683 )

Income tax expense

Net loss from continuing operations

( 8,178,434 )

( 4,707,249 )

Net income from discontinued operations, net of tax

Net (loss) income

Net income (loss)

Other comprehensive income (loss), net of tax:

Unrealized gains/(losses) on available-for-sale securities

Unrealized (losses)/gains on available-for-sale securities

Foreign currency translation adjustment

Total other comprehensive income

Comprehensive (loss) income

Comprehensive income (loss)

Basic net (loss) income per share:

6 unchanged sentences

Weighted Average Dilutive Shares Outstanding

Dividends declared per share

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

AND SU BSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'

Comprehensive

Income (Loss)

BALANCE AT DECEMBER 31, 2019

18 unchanged sentences

Other share retirements

( 3,342,526 )

( 1,436,068 )

( 4,812,445 )

Shareholder dividends ($ 3.50 per share)

( 34,022,199 )

Other comprehensive income

BALANCE AT DECEMBER 31, 2021

( 28,349,336 )

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SUBSIDIARIES

AND SU BSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Ended December 31

Year Ended December 31

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

Net income (loss)

Net income from discontinued operations, net of tax

Net (loss) income from continuing operations

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Net loss from continuing operations

( 8,178,434 )

( 4,707,249 )

Adjustments to reconcile net (loss) income to

net cash (used in) provided by operating activities:

Depreciation and amortization

1 unchanged sentence

Deferred taxes

(Gain) loss on sale of assets

Impairment loss

Gain on sale of assets

Changes in assets and liabilities:

Trade accounts receivables

Trade accounts receivables, net

( 3,883,662 )

Inventories, net

Prepaid income taxes

2 unchanged sentences

Other accrued liabilities

Income taxes payable

Net cash (used in) provided by operating activities - continuing operations

Net cash used in operating activities - continuing operations

( 4,225,822 )

( 7,077,983 )

Net cash (used in) provided by operating activities - discontinued operations

Net cash (used in) provided by operating activities

Net cash used in operating activities

( 4,612,394 )

( 4,683,529 )

CASH FLOWS FROM INVESTING ACTIVITIES:

1 unchanged sentence

Acquisition of business, net of cash acquired

Purchases of investments

( 4,797,919 )

Purchases of investments

( 18,665,534 )

1 unchanged sentence

Proceeds from the sale of investments

Net cash used in investing activities - continuing operations

Net cash provided by (used in) investing activities - continuing operations

( 4,694,355 )

Net cash provided by investing activities - discontinued operations

Net cash provided by (used in) investing activities

Net cash provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Cash dividends paid

( 34,038,346 )

Proceeds from issuance of common stock, net of shares withheld

Payment of contingent consideration related to acquisition

Purchase of common stock

( 4,812,445 )

Net cash used in financing activities

( 35,587,425 )

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

( 9,601,324 )

( 1,515,026 )

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR

4 unchanged sentences

Dividends declared not paid

Capital expenditures in accounts payable

Operating right of use assets obtained in exchange for lease obligations

2 unchanged sentences

COMMUNICATIONS SYSTEMS, INC.

AND SUBSIDIARIES

AND SUBSID IARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

Communications Systems, Inc.

(herein collectively referred to as “CSI,”

“our,”

“we”

or the “Company”) is a Minnesota

corporation organized in 1969 that classifies its business into two segments:

(1) the Electronics & Software segment (consisting

of US-based subsidiary Transition Networks and UK-based subsidiary Net2Edge) which (i) manufactures and sells solutions that provide

actionable intelligence, power and connectivity at the edge of networks through PoE products, software and services as well as

traditional products such as media converters, network adapters and other connectivity products and (ii) designs, develops, and

sells edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with

specialized cloud-based software solutions, primarily within the telecommunications market;

and (2) the Services and Support segment

(consisting of subsidiaries JDL and Ecessa), which (i) provides technology solutions including virtualization, managed services,

wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment and (ii) designs, develops,

and sells SD-WAN (software-designed wide-area network) solutions.

The Company classifies its businesses into two segments.

Non-allocated

general and administrative expenses are separately accounted for as “Other”

in the Company’s segment reporting.

is a Minnesota corporation organized in 1969 that until August 2, 2021 classified its business into two segments:

(1) the Electronics & Software segment (consisted of US-based subsidiary Transition Networks and UK-based subsidiary Net2Edge) which (i) manufactured and sold solutions that provide actionable intelligence, power and connectivity at the edge of networks through PoE products, software and services as well as traditional products such as media converters, network adapters and other connectivity products and (ii) designed, developed, and sold edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications market;

and (2) the Services and Support segment (consisting of subsidiaries JDL and Ecessa), which (i) provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment and (ii) designs, develops, and sells SD-WAN (software-designed wide-area network) solutions.

As previously disclosed, on August 2, 2021, the Company and Lantronix, Inc.

(“Lantronix”) completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to the securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”).

As a result, sales and expenses related to the operations of the former Electronics & Software segment have been presented as discontinued operations in this Form 10-K.

For purposes of this Form 10-K, the Company classifies operations as those from its Services & Support segment.

Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting.

Intersegment revenues are eliminated upon consolidation.

Principles of consolidation:

The consolidated financial

statements include the accounts of the Company and its subsidiaries.

The consolidated financial statements include the accounts of the Company and its subsidiaries.

All intercompany transactions and accounts have been eliminated.

Use of estimates:

The presentation of financial statements

in conformity with accounting principles generally accepted in the United States of America requires management to make estimates

and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities

at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

uses estimates based on the best information available in recording transactions and balances resulting from operations.

results could differ from those estimates.

The Company’s estimates consist principally of reserves for doubtful accounts,

sales returns, warranty costs, asset impairment evaluations, accruals for compensation plans, self-insured medical and dental accruals,

lower of cost or market inventory adjustments, provisions for income taxes and deferred taxes, and depreciable lives of fixed assets.

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The Company uses estimates based on the best information available in recording transactions and balances resulting from operations.

Actual results could differ from those estimates.

The Company’s estimates consist principally of reserves for doubtful accounts, sales returns, warranty costs, asset impairment evaluations, accruals for compensation plans, self-insured medical and dental accruals, lower of cost or market inventory adjustments, provisions for income taxes and deferred taxes, and depreciable lives of fixed assets.

Cash equivalents:

For purposes of the consolidated statements

of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase

to be cash equivalents.

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

As of December 31, 2021, the Company had $ 3,491,000 in cash and cash equivalents.

Of this amount, $9,424,000

was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by

the federal deposit insurance company (FDIC) or other government agency.

These money market funds seek to preserve the value of

the investment at $1.00 per share;

Of this amount, $ 855,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the federal deposit insurance company (FDIC) or other government agency.

These money market funds seek to preserve the value of the investment at $ 1.00 per share;

however, it is possible to lose money investing in these funds.

The remainder is operating cash

and certificates of deposit which are fully insured through the FDIC.

Investments consist of corporate notes and

bonds, and commercial paper that are traded on the open market and are classified as available-for-sale and minority investments

in strategic technology companies.

Available-for-sale investments are reported at fair value with unrealized gains and losses excluded

from operations and reported as a separate component of stockholders’

equity, net of tax (see Accumulated other comprehensive

Inventories are stated at the lower of cost

or net realizable value.

The remainder is operating cash and certificates of deposit which are fully insured through the FDIC.

Investments consist of corporate notes and bonds and commercial paper that are traded on the open market and are classified as available-for-sale and minority investments in strategic technology companies.

Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders’ equity, net of tax (see Accumulated other comprehensive loss below).

Inventories are stated at the lower of cost or net realizable value.

Cost is determined by the first-in, first-out method.

Provision to reduce inventories to the lower of

cost or net realizable value is made based on a review of excess and obsolete inventories, estimates of future sales, examination

of historical consumption rates and the related value of component parts.

Property, plant and equipment:

Provision to reduce inventories to the lower of cost or net realizable value is made based on a review of excess and obsolete inventories, estimates of future sales, examination of historical consumption rates and the related value of component parts.

Property, plant and equipment:

are recorded at cost.

Property, plant and equipment are recorded at cost.

Depreciation is computed using the straight-line method.

Depreciation included in cost of sales and selling,

general and administrative expenses for continuing operations was $757,000 and $1,028,000 for 2020 and 2019, respectively.

and repairs are charged to operations and additions or improvements are capitalized.

Items of property sold, retired or otherwise

disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected

in operations.

Depreciation included in cost of sales and selling, general and administrative expenses for continuing operations was $ 365,000 and $ 371,000 for 2021 and 2020, respectively.

Maintenance and repairs are charged to operations and additions or improvements are capitalized.

Items of property sold, retired or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected in operations.

Goodwill and Other Intangible Assets:

represents the amount by which the purchase prices (including liabilities assumed) of acquired businesses exceed the estimated

fair value of the net tangible assets and separately identifiable assets of these businesses.

Goodwill and intangible assets

with indefinite useful lives are not amortized but are tested at least annually for impairment.

Company reassesses the value of our reporting units and related goodwill balances annually on April 1 and at other times if events

have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable.

Goodwill represents the amount by which the purchase prices (including liabilities assumed) of acquired businesses exceed the estimated fair value of the net tangible assets and separately identifiable assets of these businesses.

Goodwill and intangible assets with indefinite useful lives are not amortized but are tested at least annually for impairment.

The Company reassesses the value of our reporting units and related goodwill balances annually on April 1 and at other times if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable.

Recoverability of long-lived assets:

The Company reviews

its long-lived assets periodically when impairment indicators exist as required under generally accepted accounting principles.

Potential impairment is determined by comparing the carrying value of the assets with expected net cash flows expected to be provided

by operating activities of the business or related products.

If the sum of the expected future net cash flows is less than the

carrying value, an impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value

of the asset.

The Company reserves for the estimated cost

of product warranties at the time revenue is recognized.

We estimate the costs of our warranty obligations based on our warranty

policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service

delivery costs incurred in correcting product failures.

Management reviews the estimated warranty liability on a quarterly basis

to determine its adequacy.

The following table presents the changes in the Company’s

warranty liability, included in other accrued liabilities in the consolidated balance sheets, for the years ended December 31,

2020 and 2019, which relate to normal product warranties and a five-year obligation to provide for potential future liabilities

for certain network equipment sales:

Ended December 31

Beginning balance

Amounts charged to expense

Actual warranty costs paid

Ending balance

The Company reviews its long-lived assets periodically when impairment indicators exist as required under generally accepted accounting principles.

Potential impairment is determined by comparing the carrying value of the assets with expected net cash flows expected to be provided by operating activities of the business or related products.

If the sum of the expected future net cash flows is less than the carrying value, an impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset.

Accumulated other comprehensive loss:

The components

of accumulated other comprehensive loss are as follows:

(loss)/gain on

Comprehensive

The components of accumulated other comprehensive loss are as follows:

Foreign Currency Translation

Unrealized (loss)/gain on securities

Accumulated Other Comprehensive Loss

December 31, 2019

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Revenue recognition :

The Company’s manufacturing

operations (Electronics & Software segment) recognize revenue upon delivery of the Company’s connectivity infrastructure

and data transmission products.

To determine when revenue should be recognized, it is important to determine when the transfer

of control has occurred.

The Company has determined that control transfers for these products upon shipment or delivery to the

customer, in accordance with the agreed upon shipping terms.

As such, the timing of revenue recognition occurs at a specific point

Sales are made directly to customers and through distributors.

Payment terms for distributors are consistent with the

terms of the Company’s direct customers.

The Company records a provision for sales returns, sales incentives and warranty

costs at the time of the sale based on historical experience and current trends.

The Company has determined that the following performance obligations identified in its Services and Support segment are transferred

managed services and professional services (time and materials (“T&M”) and fixed price).

This segment’s

managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and

that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract.

T&M professional

services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation.

Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input

method based on hours expended.

The Company has also identified the following performance obligations

within its Services and Support segment that are recognized at a point in time which include resale of third-party hardware and

software, installation, arranging for another party to transfer services to the customer, and certain professional services.

resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s

location, in accordance with the agreed upon shipping terms.

Installation services are recognized at a point in time when the services

are completed.

The service the Company provides to arrange for another party to transfer services to the customer is satisfied

at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party

vendor, which are required to be presented on a net basis.

Depending on the nature of the service, certain professional services

transfer control at a point in time.

The Company evaluates these circumstances on a case by case basis to determine if revenue

should be recognized over time or at a point in time.

The Company has determined that the following performance obligations identified in its Services and Support segment are transferred over time:

managed services and professional services (time and materials (“T&M”) and fixed price).

This segment’s managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract.

T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation.

Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.

The Company has also identified the following performance obligations within its Services and Support segment that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services.

The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the agreed upon shipping terms.

Installation services are recognized at a point in time when the services are completed.

The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party vendor, which are required to be presented on a net basis.

Depending on the nature of the service, certain professional services transfer control at a point in time.

The Company evaluates these circumstances on a case-by-case basis to determine if revenue should be recognized over time or at a point in time.

See Note 2 for further discussion regarding revenue recognition.

Research and development:

Research and development costs

consist of outside testing services, equipment and supplies associated with enhancing existing products and developing new products.

Research and development costs are expensed when incurred and totaled $2,808,000 in 2020 and $3,600,000 in 2019.

Employee Retirement Benefits:

The Company has an Employee

Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation.

Contributions to the

plan in 2020 and 2019 were $371,000 and $401,000, respectively.

The Company has an Employee Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation.

Contributions to the plan in 2021 and 2020 were $ 122,000 and $ 109,000 , respectively.

Net income (loss) per share:

Basic net income (loss)

per common share is based on the weighted average number of common shares outstanding during each year.

Diluted net income (loss)

per common share adjusts for the dilutive effect of potential common shares outstanding.

The Company’s only potential common

shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in no

dilutive effect for 2020 and a dilutive effect of 65,163 shares in 2019.

Due to the net loss in 2020, there was no dilutive

impact from outstanding stock options or unvested shares.

The Company calculates the dilutive effect of outstanding options

and unvested shares using the treasury stock method.

Options totaling 697,201 would have been excluded from the calculation of

diluted earnings per share for year ended December 31, 2020, because the exercise price was greater than the average market price

of common stock during the year and deferred stock awards totaling 110,308 shares would not have been included because of unmet

performance conditions.

Options totaling 860,539 were excluded from the calculation of diluted earnings per share for year ended

December 31, 2019, because the exercise price was greater than the average market price of common stock during the year and deferred

stock awards totaling 178,278 shares were not included because of unmet performance conditions.

Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during each year.

Diluted net income (loss) per common share adjusts for the dilutive effect of potential common shares outstanding.

The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in a dilutive effect of 137,661 shares for 2021 and no dilutive effect in 2020.

Due to the net loss in 2020, there was no dilutive impact from outstanding stock options or unvested shares.

The Company calculates the dilutive effect of outstanding options and unvested shares using the treasury stock method.

There were no options or deferred stock awards excluded from the calculation of diluted earnings per share because there were no outstanding options or deferred stock awards as of December 31, 2021.

Options totaling 697,201 would have been excluded from the calculation of diluted earnings per share for year ended December 31, 2020, because the exercise price was greater than the average market price of common stock during the year and deferred stock awards totaling 110,308 shares would not have been included because of unmet performance conditions.

Share based compensation:

Company accounts for share based compensation awards on a fair value basis.

The estimated grant date fair value of each stock-based

award is recognized in income over the requisite service period (generally the vesting period).

The estimated fair value of each

option is calculated using the Black-Scholes option-pricing model.

The Company accounts for share-based compensation awards on a fair value basis.

The estimated grant date fair value of each stock-based award is recognized in income over the requisite service period (generally the vesting period).

The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.

Accounting standards issued:

In June 2016, the Financial Accounting Standards Board (“FASB”)

issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement

of Credit Losses on Financial Instruments.”

The amendments in this update replace the incurred loss impairment methodology

in current U.S.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects expected credit losses.

This ASU is intended to provide financial statement

users with more decision-useful information about expected credit losses and is effective for annual periods and interim periods

for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023.

early adopt beginning after December 15, 2018.

We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated

financial statements.

This ASU is intended to provide financial statement users with more decision-useful information about expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023.

Entities may early adopt beginning after December 15, 2018.

We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

Accounting standards adopted:

In August 2018, the FASB issued ASU 2018-13, “Fair Value

Measurement.”

This new standard requires changes to the disclosure requirements for fair value measurements for certain Level

3 items and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively.

standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within

those fiscal years, with early adoption permitted.

the company adopted this standard during 2020 with an immaterial impact to our

consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying

the Accounting for Income Taxes”, which, as part of its Simplification Initiative to reduce the cost and complexity in accounting

for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating

income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also

amends other aspects of the guidance to help simplify and promote consistent application of GAAP.

The guidance is effective for

interim and annual periods beginning after December 15, 2020, with early adoption permitted.

The Company adopted this standard

during 2020 with an immaterial impact to our consolidated financial statements.

NOTE 2 –

REVENUE RECOGNITION

In accordance with Accounting Standards Codification (“ASC”)

606, revenue is recognized when a customer obtains control of promised goods or services.

The amount of revenue recognized reflects

the consideration that the Company expects to receive in exchange for these goods or services.

Electronics & Software

The Company has determined that the revenue recognition for

its Electronics & Software segment occurs upon delivery of the Company’s connectivity infrastructure and data transmission

To determine when revenue should be recognized, it is important to determine when the transfer of control has occurred.

The Company has determined that control transfers for these products upon shipment or delivery to the customer, in accordance with

the agreed upon shipping terms.

As such, the timing of revenue recognition occurs at a specific point in time.

Services & Support

The Company has determined that the following performance obligations

identified in its Services & Support segment are transferred over time:

managed services and professional services (time and

materials (“T&M”) and fixed price).

The managed services performance obligation is a bundled solution, a series

of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized

evenly over the term of the contract.

T&M professional services arrangements are measured over time with an input method based

on hours expended towards satisfying this performance obligation.

Fixed price professional service arrangements under a relatively

longer-term service will also be measured over time with an input method based on hours expended.

The Company has also identified the following performance obligations

within its Services & Support segment that are recognized at a point in time which include resale of third-party hardware and

software, installation, arranging for another party to transfer services to the customer, and certain professional services.

resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s

location, in accordance with the agreed upon shipping terms.

Installation services are recognized at a point in time when the services

are completed.

The service the Company provides to arrange for another party to transfer services to the customer is satisfied

at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party

vendor, which are required to be presented on a net basis.

Depending on the nature of the service, certain professional services

transfer control at a point in time.

The Company evaluates these circumstances on a case-by-case basis to determine if revenue

should be recognized over time or at a point in time.

NOTE 2 – REVENUE RECOGNITION

In accordance with Accounting Standards Codification (“ASC”) 606, revenue is recognized when a customer obtains control of promised goods or services.

The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services.

The Company has determined that the following performance obligations identified in its Services & Support segment are transferred over time:

managed services and professional services (time and materials (“T&M”) and fixed price).

The managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract.

T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation.

Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.

The Company has also identified the following performance obligations within its Services & Support segment that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services.

Installation services are recognized at a point in time when the services are completed.

Depending on the nature of the service, certain professional services transfer control at a point in time.

The Company evaluates these circumstances on a case-by-case basis to determine if revenue should be recognized over time or at a point in time.

Significant Judgments

To determine the transaction price, the Company estimates the

amount of variable consideration at the outset of the contract, depending on the facts and circumstances relative to the contract.

The Company may provide credits or incentives to its customers, which are accounted for as either variable consideration or consideration

payable to the customer.

To determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract, depending on the facts and circumstances relative to the contract.

The Company may provide credits or incentives to its customers, which are accounted for as either variable consideration or consideration payable to the customer.

The Company estimates product returns based on historical return rates.

The Company constrains (reduces)

the estimates of variable consideration such that it is probable that a significant revenue reversal of previously recognized revenue

will not occur throughout the life of the contract.

When determining if variable consideration should be constrained, management

considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant revenue reversal of previously recognized revenue will not occur throughout the life of the contract.

When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue.

will assess if any incentives it offers to its customer is a consideration payable.

The Company accounts for consideration payable

to a customer as a reduction of the transaction price, and therefore, of revenue.

For contracts with more than one performance

obligation, the consideration is allocated between separate products and services based on their stand-alone selling prices.

is required to determine standalone selling prices for each distinct performance obligation.

The Company generally determines standalone

selling prices based on the actual prices charged to customers and has an established range of amounts that fall within stand-alone

selling price for its distinct performance obligations.

The Company will assess if any incentives it offers to its customer is a consideration payable.

The Company accounts for consideration payable to a customer as a reduction of the transaction price, and therefore, of revenue.

For contracts with more than one performance obligation, the consideration is allocated between separate products and services based on their stand-alone selling prices.

Judgment is required to determine standalone selling prices for each distinct performance obligation.

The Company generally determines standalone selling prices based on the actual prices charged to customers and has an established range of amounts that fall within stand-alone selling price for its distinct performance obligations.

The Company evaluates this range quarterly.

Costs to Obtain or Fulfill a Contract

The Company evaluates “Other Assets and Deferred Costs”

(ASC 340-40), for the accounting for certain costs to obtain and fulfill contracts (or, in some cases, an anticipated contract)

with a customer.

ASC 340-40 is applicable only to incremental contract costs, those that an entity would not have incurred if the

contract had not been obtained, and requires the capitalization of these costs as well as provides guidance on the amortization

and impairment considerations.

The Company evaluates “Other Assets and Deferred Costs” (ASC 340-40), for the accounting for certain costs to obtain and fulfill contracts (or, in some cases, an anticipated contract) with a customer.

ASC 340-40 is applicable only to incremental contract costs, those that an entity would not have incurred if the contract had not been obtained, and requires the capitalization of these costs as well as provides guidance on the amortization and impairment considerations.

The Company elects the practical expedient and expenses certain costs to obtain contracts when applicable.

Within Services & Support, commissions were paid upfront on certain long-term recurring revenue agreements.

Total costs to

obtain a contract in the years ended December 31, 2020 and 2019 were $52,000 and $0, respectively.

Total costs to obtain a contract in the years ended December 31, 2021 and 2020 were $ 25,000 and $ 52,000 , respectively.

Transaction Price Allocated to Future Performance Obligations

To determine the allocation of the transaction price and amounts

allocated to the performance obligations, the Company first determined the standalone selling price for each distinct performance

obligation in the contract in order to determine the allocations of the transaction price in proportion to the standalone selling

price for each performance obligation in the contract in accordance with ASC 606-10-32-31 and 32-33.

Judgment is required to determine

standalone selling price for each distinct performance obligation.

The Company generally determines standalone selling prices based

on the actual prices charged to customers and has an established range of amounts that fall within stand-alone selling price for

its distinct performance obligations.

To determine the allocation of the transaction price and amounts allocated to the performance obligations, the Company first determined the standalone selling price for each distinct performance obligation in the contract in order to determine the allocations of the transaction price in proportion to the standalone selling price for each performance obligation in the contract in accordance with ASC 606-10-32-31 and 32-33.

Judgment is required to determine standalone selling price for each distinct performance obligation.

The Company evaluates this range quarterly.

Practical Expedients and Exemptions

The Company adopted various practical expedients

and policy elections related to the accounting for significant finance components, sales taxes, shipping and handling, costs to

obtain a contract and immaterial promised goods or services.

The practical expedient to disclose the unfulfilled performance obligations

was not made as they are expected to be fulfilled within one year.

The Company adopted various practical expedients and policy elections related to the accounting for significant finance components, sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services.

The practical expedient to disclose the unfulfilled performance obligations was not made as they are expected to be fulfilled within one year.

Disaggregation of revenue

Revenues are recognized when control of the promised goods or

services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for

those goods or services.

In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues, which

is different for each segment.

For the Electronics & Software segment, we analyze revenue

by region and product group, which is as follows for the years ended December 31, 2020 and 2019:

& Software Revenue by Region

North America

International

& Software Revenue by Product Group

Intelligent edge solutions

Traditional products

For the Services & Support segment, we analyze revenue by

customer group and type, which is as follows for the years ended December 31, 2020 and 2019:

Support Revenue by Customer Group

Financial and other commercial clients

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services.

In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues.

For the Services & Support segment, we analyze revenue by customer group and type, which is as follows for the years ended December 31, 2021 and 2020:

Services & Support Revenue

‎ by Customer Group

Other commercial clients

CSI IT operations

Support Revenue by Type

Services & Support Revenue

Project & product revenue

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Contract Balances

The contract assets associated with the commission costs noted

above were $267,000 and $0 at December 31, 2020 and 2019, respectively.

The Company does not have material contract liabilities.

NOTE 3 –

In accordance with ASC Topic 842, the Company recognizes assets

and liabilities for the rights and obligations created by leases that extend more than twelve months from the date of the balance

Right of use (“

ROU”) assets represent our right to use an underlying asset for the

lease term, while lease liabilities represent our obligation to make lease payments arising from the lease.

Lease ROU assets and

liabilities are recognized at the commencement date of a lease based on the present value of lease payments over the lease term.

Because the rate implicit in each individual lease is not readily determinable, the Company uses its incremental borrowing rate

to determine the present value of the lease payments.

The Company has entered into operating leases for three office

locations, including one in February 2019 and one in May 2020 upon the acquisition of Ecessa.

These leases have remaining lease

terms of 2 to 7 years.

One of the leases includes two options to extend the lease for 5 years each, and the other lease includes

an option to terminate the lease in 2022.

One lease includes a 3% rent adjustment on each anniversary of the lease and another

includes a 2.5% annual rent adjustment as well as one free month each year.

As of December 31, 2020, total ROU assets and operating

lease liabilities were $413,000 and $411,000, respectively.

As of December 31, 2019, total ROU assets and operating lease liabilities

were $368,000 and $360,000, respectively.

The contract assets associated with the commission costs noted above were $ 323,000 and $ 267,000 at December 31, 2021 and 2020, respectively.

The Company does no t have material contract liabilities.

NOTE 3 – LEASES

In accordance with ASC Topic 842, the Company recognizes assets and liabilities for the rights and obligations created by leases that extend more than twelve months from the date of the balance sheet.

Right of use (“ ROU”) assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease.

Lease ROU assets and liabilities are recognized at the commencement date of a lease based on the present value of lease payments over the lease term.

Because the rate implicit in each individual lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

The Company has entered into operating leases for two office locations, including one in February 2019 and one in May 2020 upon the acquisition of Ecessa.

These leases have remaining lease terms of 10 months to 2 years.

One of the leases includes two options to extend the lease for 5 years each.

One lease includes a 3 % rent adjustment on each anniversary of the lease and another includes a 2.5 % annual rent adjustment as well as one free month each year.

As of December 31, 2021, total ROU assets and operating lease liabilities were $ 160,000 and $ 168,000 , respectively.

As of December 31, 2020, total ROU assets and operating lease liabilities were

$ 284,000 and $ 295,000 , respectively.

All operating lease expense is recognized on a straight-line basis over the lease term.

In the years ended December 31, 2021 and 2019, the Company recognized $ 132,000 and $ 95,000 in lease expense, respectively.

Company also recognized $82,000 and $0 in sublease income for the years ended December 31, 2020 and 2019, respectively.

Information related to the Company’s ROU assets and related

lease liabilities were as follows:

The Company also recognized $ 195,000 and $ 82,000 in sublease income for the years ended December 31, 2021 and 2020, respectively.

Information related to the Company’s ROU assets and related lease liabilities were as follows:

Year Ended December 31

4 unchanged sentences

Weighted-average discount rate

(1) 2019 includes $280,000 for operating leases existing

on January 1, 2019 and $188,000 for operating leases that commenced in the first quarter of 2019.

2020 includes $209,000 for an

operating lease assumed with the Ecessa acquisition in the second quarter.

Maturities of lease liabilities as of December 31, 2020 were

(1) 2020 includes $ 209,000 for an operating lease assumed with the Ecessa acquisition in the second quarter.

Maturities of lease liabilities as of December 31, 2021 were as follows:

Total lease payments

1 unchanged sentence

Total operating lease liabilities

As of December 31, 2020, the Company does not have any additional

future operating lease obligations that have not yet commenced.

NOTE 4 –

DISCONTINUED OPERATIONS

On April 5, 2019, the Company sold its Suttle FutureLink™

Fiber business line, including inventory, equipment, and customer relationships, to PPC Broadband Inc.

(“PPC”).

transaction was structured as an Asset Purchase Agreement with a simultaneous signing and closing.

The sale price was $5,000,000

cash, of which $500,000 was deferred into an escrow account until certain criteria were met and was recorded as restricted cash

within the consolidated balance sheet.

The Company recognized a gain on the sale of inventory and capital equipment totaling $2,967,000

during the second quarter of 2019.

Concurrent with the closing of the transaction, Suttle and PPC entered into a Transition Services

Agreement under which Suttle agreed to manufacture products related to the FutureLink™

Fiber business line until September

30, 2019, to ensure seamless supply to the customer base.

On March 11, 2020, the Company sold the remainder of its Suttle

business lines, including the SoHo, MediaMAX, and SpeedStar brands and inventory as well as working capital, certain capital equipment,

intellectual property, and customer relationships to Oldcastle Infrastructure, Inc.

(“Oldcastle”) for $8,000,000, with

a working capital adjustment 90 days after close.

Oldcastle will operate the majority of the acquired Suttle business through its

wholly-owned subsidiary, Primex Technologies, Inc.

Through the sale to Primex, a separate online equipment auction held in the

fourth quarter of 2020, and various other sales, the Company received total proceeds of $8,900,000 and recorded a gain on the sale

of $2,247,000 in 2020.

Concurrent with the closing of the transaction, the Company

and Oldcastle entered into a Transition Services Agreement (“TSA”) under which Suttle continued to manufacture products

for Oldcastle for six months, to ensure seamless supply and quality assurance to the existing customer base.

Concurrently with

the closing of the transaction and the TSA, the Company and Oldcastle also entered into a lease agreement under which Oldcastle

will lease two buildings in Hector, Minnesota, where Suttle had conducted operations.

Base rents under the lease agreement range

from $6,970 to $7,180 per month.

The associated assets and liabilities related to this sale were classified as held for sale at

December 31, 2019.

As of December 31, 2021, the Company does no t have any additional future operating lease obligations that have not yet commenced.

NOTE 4 – DISCONTINUED OPERATIONS

On March 11, 2020, the Company sold the remainder of its Suttle business lines, including the SoHo, MediaMAX, and SpeedStar brands and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle Infrastructure, Inc.

(“Oldcastle”) for $ 8,000,000 , with a working capital adjustment 90 days after close.

Oldcastle will operate the majority of the acquired Suttle business through its wholly owned subsidiary, Primex Technologies, Inc.

Through the sale to Primex, a separate online equipment auction held in the fourth quarter of 2020, and various other sales, the Company received total proceeds of $ 8,900,000 and recorded a gain on the sale of $ 2,247,000 in 2020.

The presentation of discontinued operations has been retrospectively applied to all prior periods presented.

The assets and liabilities of this discontinued operation that

are classified as held for sale are as follows:

Trade accounts receivable

On August 2, 2021, the Company and Lantronix completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to a securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”).

The Company received net proceeds of $ 23,630,000 , which included a working capital adjustment of $( 1,376,000 ) and recorded a gain on sale of $ 13,455,000 during the third quarter of 2021.

The presentation of discontinued operations with respect to this E&S Sale Transaction has been retrospectively applied to all prior periods presented.

Under the securities purchase agreement, Lantronix has also agreed to pay CSI, if earned, earnout payments of up to $ 7.0 million payable following two successive 180 -day intervals after the closing of the E&S Sale Transaction based on revenue targets for the business of the TN Companies as specified in the securities purchase agreement, subject to certain adjustments and allocations as further described in the securities purchase agreement.

Concurrently with the closing of the transaction, CSI and Lantronix entered into a transition services agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix at CSI’s Minnetonka, Minnesota facility for a period of up to twelve months .

On December 15, 2021, the Company sold its remaining real and personal property located in Hector, Minnesota, related to its former Suttle operations, with net proceeds of $ 842,000 .

The presentation of discontinued operations related these assets has been retrospectively applied to all prior periods presented.

On November 18, 2021, the Company entered into a purchase agreement with Buhl Investors LLC, a Minnesota limited liability company, or its affiliated assignee for the sale of the Company’s headquarters building located in Minnetonka, Minnesota for

$ 6,800,000 .

The agreement was amended on February 15, 2022 to allow for additional time to complete due diligence.

The Company recorded the assets as held for sale at December 31, 2021.

The assets and liabilities of this discontinued operation that are classified as held for sale are as follows:

December 31, 2021

December 31, 2020

Cash and cash equivalents

Trade accounts receivable, net

Inventories, net

Other current assets

Total current assets

Property, plant, and equipment

Property, plant, and equipment, net

Right of use asset

Total noncurrent assets

1 unchanged sentence

Accounts payable

Accrued compensation and benefits

Operating lease liability

Other accrued liabilities

Total current liabilities

Operating lease liability

Total noncurrent liabilities

Total liabilities held for sale

The financial results of the discontinued operations are as

Ended December 31

The financial results of the discontinued operations are as follows:

Year Ended December 31

Cost of sales

Selling, general and administrative expenses

Transaction costs

Impairment loss

Restructuring expenses

(Gain) loss on sale of assets

Gain on sale of assets

( 13,451,000 )

( 2,247,000 )

Foreign currency translation loss

Other expense

Operating income before income taxes

Income tax expense

Income (loss) from discontinued operations

During the year ended December 31, 2020, the Company recorded

$960,000 in restructuring expense.

This consisted of severance and related benefits costs due to the sale of the remainder of Suttle’s

business lines and the closure of the plant now that the TSA is completed.

We expect total restructuring costs to be $1,000,000,

including any remaining shut down costs.

The Company paid $708,000 in restructuring charges during 2020 and had $252,000 in restructuring

accruals recorded in accrued compensation and benefits at December 31, 2020 that are expected to be paid during 2021.

NOTE 5 –BUSINESS COMBINATIONS

On May 14, 2020, in a reverse triangular merger, the Company

completed the acquisition of 100% of Ecessa Corporation.

Ecessa designs and distributes software-defined wide area networking (SD-WAN)

solutions for businesses through the deployment of over 10,000 field installations (since 2002) of Ecessa Edge®, PowerLink®,

and WANworX®

The acquisition expands the Company’s IoT intelligent edge products and services and provides

opportunities to expand the Company’s services platform.

The purchase price was $4,642,000, with cash acquired totaling $666,000.

Income from discontinued operations

During the year ended December 31, 2021, the Company recorded $ 1,811,000 in restructuring expense, with $ 1,343,000 in discontinued operations.

This consisted of severance and related benefits costs due to the sale of the E&S segment.

The Company incurred $ 960,000 in restructuring costs in 2020 related to the sale of Suttle’s business lines and had $ 252,000 in restructuring accruals recorded in accrued compensation and benefits at December 31, 2020.

The Company paid $ 1,547,000 in restructuring charges during 2021 and had $ 516,000 in restructuring accruals recorded in accrued compensation and benefits at December 31, 2021 that are expected to be paid during 2022.

NOTE 5 –BUSINESS COMBINATIONS

On May 14, 2020, in a reverse triangular merger, the Company completed the acquisition of 100 % of Ecessa Corporation.

Ecessa designs and distributes software-defined wide area networking (SD-WAN) solutions for businesses through the deployment of over 10,000 field installations (since 2002) of Ecessa Edge®, PowerLink®, and WANworX® controllers.

The acquisition expands the Company’s IoT intelligent edge products and services and provides opportunities to expand the Company’s services platform.

purchase price was $ 4,642,000 , with cash acquired totaling $ 666,000 .

The purchase price includes initial consideration of $ 4,666,000 and $( 24,000 ) in working capital adjustments.

The assets and liabilities of Ecessa were recorded in the consolidated

balance sheet within the Services & Support segment as of the acquisition date, at their respective fair values.

price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been allocated as follows:

The assets and liabilities of Ecessa were recorded in the consolidated balance sheet within the Services & Support segment as of the acquisition date, at their respective fair values.

The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been allocated as follows:

Current assets

4 unchanged sentences

Net assets acquired

Identifiable intangible assets are

definite-lived assets.

These assets include trade name/trademark/internet domain assets, non-compete agreements, customer relationships,

and internally developed software intangible assets, and have a weighted average amortization period of 7 years, which matches

the weighted average useful life of the assets.

Identifiable intangible assets are definite-lived assets.

These assets include trade name/trademark/internet domain assets, non-compete agreements, customer relationships, and internally developed software intangible assets, and have a weighted average amortization period of 7 years, which matches the weighted average useful life of the assets.

Goodwill recorded as part of the purchase price allocation is not tax deductible.

The pro forma impact of Ecessa was not significant to the Company’s results for the year ended December 31, 2020.

Ecessa’s revenue and operating loss since acquisition are $1,265,000 and $ (598,000), respectively.

The operating loss is

primarily due to the revaluation of $1,561,000 of pre-acquisition deferred revenue to a preliminary fair value of $257,000 as of

the opening balance sheet date and $205,000 of intangibles amortization, thus lowering revenue recognized and increasing post-acquisition

expenses on a similar operating cost structure.

The Company is still in process of integrating Ecessa into its operations and therefore

has not realized all potential cost-saving synergies.

On November 3, 2020, the Company

acquired the operating assets of privately held IVDesk Minnesota, Inc.

(“IVDesk”) from a third-party receiver (“Receiver”).

IVDesk provides private cloud services to small- and mid-size businesses (SMB), with a particular focus on the financial

services industry.

The acquisition expands the Company’s monthly recurring revenue service model, bringing additional resources

and experience in cloud-delivered applications.

The purchase price was $1,368,000 and includes initial

consideration of $950,000, working capital adjustments of $ (132,000), and $550,000 in contingent consideration.

The Company has

agreed to pay up to $550,000 in additional consideration upon retaining a certain customer level 120 days after closing.

provided the Receiver as seller a $550,000 letter of credit to secure its obligation to pay the earn-out under the asset purchase

At December 31, 2020, the Company had estimated liabilities of $550,000 related to the outstanding consideration.

March 2021, upon meeting the requirements of the earn-out, the Company paid the Receiver the additional consideration.

The estimated assets and liabilities of IVDesk are recorded

in the consolidated balance sheet within the Services & Support segment at December 31, 2020.

The preliminary purchase price

allocation was based on estimates of the fair value of assets acquired and liabilities assumed, and included total assets of $1,500,000,

including estimated goodwill of $745,000 and estimated intangibles of $720,000, and total liabilities of $132,000.

The fair value

of acquired identifiable intangible assets of $720,000 is provisional depending on the final valuations for those assets.

recorded are estimated amounts and the Company expects to finalize the purchase price allocation during the first half of 2021

as the valuation of identifiable assets and liabilities is completed.

The pro forma impact of IVDesk was not significant to the

Company’s results for the year ended December 31, 2020.

IVDesk’s revenue since acquisition was $401,000.

NOTE 6 –CASH EQUIVALENTS AND INVESTMENTS

The following tables show the Company’s cash equivalents

and available-for-sale securities’

amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant

investment category recorded as cash equivalents or short and long-term investments as of December 31, 2020 and December 31, 2019:

On November 3, 2020, the Company acquired the operating assets of privately held IVDesk Minnesota, Inc.

(“IVDesk”) from a third-party receiver (“Receiver”).

IVDesk provides private cloud services to small- and mid-size businesses (SMB), with a particular focus on the financial services industry.

The acquisition expands the Company’s monthly recurring revenue service model, bringing additional resources and experience in cloud-delivered applications.

The purchase price was $ 1,368,000 and includes initial consideration of $ 950,000 , working capital adjustments of $( 132,000 ), and $ 550,000 in contingent consideration, which the Company agreed to pay up to $ 550,000 in additional consideration upon retaining a certain customer level 120 days after closing.

During March 2021, upon meeting the requirements of the earn-out, the Company paid the Receiver the additional consideration.

At December 31, 2021, the Company had no further liabilities related to the contingent consideration.

The assets and liabilities of IVDesk are recorded in the consolidated balance sheet within the Services & Support segment at December 31, 2021.

The purchase price allocation was based on estimates of the fair value of assets acquired and liabilities assumed, and included total assets of $ 1,500,000 , including property, plant, and equipment of $ 35,000 , goodwill of $ 745,000 and intangible assets of $ 720,000 , and total liabilities of $ 132,000 .

Identifiable intangible assets are definite-lived assets.

These assets include customer relationships and have a weighted average amortization period of 8 years, which matches the weighted average useful life of the assets.

NOTE 6 –CASH EQUIVALENTS AND INVESTMENTS

The following tables show the Company’s cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash equivalents or short and long-term investments as of December 31, 2021 and December 31, 2020:

December 31, 2021

7 unchanged sentences

Money Market funds

Commercial Paper

Corporate Notes/Bonds

1 unchanged sentence

December 31, 2020

Unrealized Gains

Unrealized Losses

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Cash Equivalents

Short-Term Investments

Long-Term Investments

Cash equivalents:

Money Market funds

2 unchanged sentences

Convertible Debt

The following table summarizes the estimated fair value of our

investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of December

The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of December 31, 2021:

Amortized Cost

Estimated Market

‎ Market Value

Due within one year

Due after one year through five years

The Company tests for other than temporary losses on a quarterly

basis and has considered the unrealized losses indicated above to be temporary in nature.

The Company intends to hold the investments

until it can recover the full principal amount and has the ability to do so based on other sources of liquidity.

The Company expects

such recoveries to occur prior to the contractual maturities.

The Company did not recognize any gross realized gains or gross

realized losses during the years ending December 31, 2020 and 2019, respectively.

If the Company had realized gains or losses,

they would be included within investment and other income in the accompanying consolidated statements of (loss) income.

In April 2020, the Company made an $899,000 minority investment

in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE solutions for

critical and secure communications.

This investment is important for the Company’s Electronics & Software segment because

this segment has been partnering with Quortus to integrate the Quortus Private LTE core in existing and new products for that segment’s

federal business, network extensions, and private networks for enterprises.

The Company’s investment represents less

than 10% of the outstanding equity of Quortus Ltd.

The Company uses the cost method to account for investments in common stock

of entities such as Quortus if the Company does not have the ability to exercise significant influence over the operating and financial

matters of the entity.

The Company also uses the cost method to account for its investments that are not in the form of common

stock or in-substance common stock in entities if the Company does not have the ability to exercise significant influence over

the entity’s operating and financial matters.

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature.

The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity.

The Company expects such recoveries to occur prior to the contractual maturities.

During 2021, the Company recognized a realized loss on its convertible debt investments and recorded $ 400,000 in expense within investment and other income (expense) in the accompanying consolidated statement of income (loss) and comprehensive income (loss).

The Company did no t recognize any gross realized gains during the years ending December 31, 2021 and 2020, respectively.

In April 2020, the Company made an $ 899,000 minority investment in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE solutions for critical and secure communications.

This investment was important for the Company’s Electronics & Software segment because this segment had been partnering with Quortus to integrate the

Quortus Private LTE core in existing and new products for that segment’s federal business, network extensions, and private networks for enterprises.

The Company’s investment represented less than 10 % of the outstanding equity of Quortus Ltd.

The Company uses the cost method to account for investments in common stock of entities such as Quortus if the Company does not have the ability to exercise significant influence over the operating and financial matters of the entity.

The Company also uses the cost method to account for its investments that are not in the form of common stock or in-substance common stock in entities if the Company does not have the ability to exercise significant influence over the entity’s operating and financial matters.

In the fourth quarter of 2021, Quortus was acquired, and the net proceeds were distributed to shareholders.

The Company received $ 650,000 in proceeds and expects to receive an additional $ 43,000 in 2022.

The Company recognized an impairment loss of $ 206,000 within operating expenses in the accompanying consolidated statement of income (loss) and comprehensive income (loss).

NOTE 7 - INVENTORIES

3 unchanged sentences

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment and the estimated useful lives

are as follows:

Property, plant and equipment and the estimated useful lives are as follows:

Buildings and improvements

5 unchanged sentences

( 3,970,000 )

NOTE 9 –

GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the year

ended December 31, 2020 by company are as follows:

NOTE 9 – GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the year ended December 31, 2021 by company are as follows:

January 1, 2020

December 31, 2020

December 31, 2021

Gross goodwill

1 unchanged sentence

Balance at December 31, 2021

The fair value of goodwill of $745,000 and acquired identifiable

intangible assets of $720,000 is provisional at December 31, 2020 depending on the final valuations for those assets.

The Company’s identifiable intangible assets with finite

lives (excluding the provisional $720,000 related to IVDesk) are being amortized over their estimated useful lives and were as

Carrying Amount

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and were as follows:

December 31, 2021

Gross Carrying Amount

Accumulated Amortization

Trade Name/Trademark/Internet Domain Assets

2 unchanged sentences

Internally Developed Software

Amortization expense on these identifiable intangible assets

was $205,000 and $0 in 2020 and 2019 respectively.

The amortization expense is included in selling, general and administrative

The estimated future amortization expense for identifiable intangible assets during the next

five fiscal years is as follows:

December 31, 2020

Gross Carrying Amount

Accumulated Amortization

Trade Name/Trademark/Internet Domain Assets

Non-compete Agreements

Customer Relationships

Internally Developed Software

Amortization expense on these identifiable intangible assets was $ 457,000 and $ 205,000 in 2021 and 2020 respectively.

The estimated future amortization expense for identifiable intangible assets during the next five fiscal years is as follows:

Year Ending December 31:

NOTE 10 –

COMMITMENTS AND CONTINGENCIES

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Line of credit:

On August 28, 2020, the Company entered

into a Credit Agreement with Wells Fargo Bank, National Association, establishing a $5,000,000 line of credit facility agreement,

that replaced a prior facility.

On August 28, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, establishing a $ 5,000,000 line of credit facility agreement that replaced a prior facility.

On October 29, 2020, the Company entered into a First Amendment to the Credit Agreement.

the Credit Agreement, as amended, the Company has the ability to obtain one or more letters of credit in an aggregate amount up

to $2,000,000, subject to the general terms of the credit agreement.

The Company had no outstanding borrowings against the line of

credit, or the prior credit facility, at December 31, 2020 or December 31, 2019 and $1,051,000 of the credit line is available

for use at December 31, 2020.

Due to the revolving nature of loans under this credit facility, additional borrowings and periodic

repayments and re-borrowings may be made until the maturity date.

Interest on borrowings on the credit line is at LIBOR plus 1.25%,

with a minimum LIBOR rate of 0.75%, (2.0% at December 31, 2020).

The Credit Agreement expires August 28, 2021 and is secured by

government securities owned and pledged by the Company.

The Credit Agreement contains financial covenants including a tangible

net worth minimum.

The Company was in compliance with its financial covenants at December 31, 2020.

As of December 31, 2020, the Company had no other material commitments

(either cancelable or non-cancelable) for capital expenditures or other purchase commitments related to ongoing operations.

Under the Credit Agreement, as amended, the Company had the ability to obtain one or more letters of credit in an aggregate amount up to $ 2,000,000 , subject to the general terms of the credit agreement.

The Company did not plan to renew the Credit Agreement upon its expiration and terminated the Credit Agreement effective August 13, 2021.

As of December 31, 2021, the Company had no other material commitments (either cancelable or non-cancelable) for capital expenditures or other purchase commitments related to ongoing operations.

Long-term compensation plans:

The Company has a long-term

incentive plan that provides long-term competitive compensation to enable the Company to attract and retain qualified executive

talent and to reward employees for achieving goals and improving company performance.

The plan provides grants of “performance

made at the beginning of performance periods and paid at the end of the period if performance goals are met.

were previously made every other year and are paid following the end of the cycle with annual vesting.

Payment in the case of retirement,

disability or death will be on a pro rata basis.

The Company recognized expense/(income) of $66,000 and $164,000 in 2020 and 2019,

respectively.

The Company has a long-term incentive plan that provides long-term competitive compensation to enable the Company to attract and retain qualified executive talent and to reward employees for achieving goals and improving company performance.

The plan provides grants of “performance units” made at the beginning of performance periods and paid at the end of the period if performance goals are met.

Awards are made every year and are paid following the end of the cycle with annual vesting.

Payment in the case of retirement, disability or death will be on a pro rata basis.

The Company recognized expense of $ 115,000 and $ 66,000 in 2021 and 2020, respectively.

Accrual balances for long-term compensation plans at December 31, 2021 and 2020 were $ 0 and $ 230,000 , respectively.

There were no award payouts in 2020 and 2019.

Awards under the 2018 to 2020 plans will be paid out 50% in cash and 50% in stock.

Awards under the 2019 to 2021 and 2020 to 2022 plans will be paid out 75% in stock and 25% in cash.

The stock portion of these

awards are treated as equity plans and included within the Stock Compensation footnote within the Deferred Stock Outstanding section

Awards paid were $ 344,000 in 2021 and $ 0 in 2020.

Awards under the 2018 to 2020 plans were paid out 50 % in cash and 50 % in stock.

Awards under the 2019 to 2021 and 2020 to 2022 plans were paid out 75 % in stock and 25 % in cash.

The stock portion of these awards are treated as equity plans and included within the Stock Compensation footnote within the Deferred Stock Outstanding section below.

PIPE Offering:

On September 15, 2021, CSI entered into an amended and restated securities purchase agreement with a group of institutional investors (the “PIPE Investors”) to make a $ 32.0 million private placement investment in CSI in connection with the closing of the previously announced merger transaction between CSI and Pineapple Energy, LLC (“Pineapple”).

Proceeds of this investment will used primarily to fund the cash portion of the purchase price to acquire Hawaii Energy Connection, LLC and E-Gear, LLC assets, to repay $ 4.5 million of Pineapple’s $ 7.5 million term loan from Hercules, for transaction expenses, and for working capital to support Pineapple’s growth strategy.

The closing of the financing is subject to approval of CSI’s shareholders and other customary conditions.

Under the terms of the securities purchase agreement, the PIPE Investors have agreed to purchase $ 32.0 million in newly authorized CSI Series A Convertible Preferred Stock convertible at a price of $ 3.40 per share into CSI common stock, with five year warrants to purchase an additional $ 32.0 million of common shares at that same price (the “PIPE Offering”).

The PIPE Offering is expected to close immediately following the consummation of the CSI-Pineapple merger transaction (the “Merger”).

Therefore the PIPE Investors will invest in the post-Merger company, will not be entitled to receive any cash dividends paid prior to closing and will not receive the Contingent Value Rights (“CVRs”) to be issued to pre-Merger CSI shareholders.

The Series A Convertible Preferred Stock will have no liquidation or dividend preference over CSI common stock and no voting rights until after converted into CSI common stock.

Assuming conversion of the Series A Convertible Preferred Stock, the PIPE Investors would own approximately 9.41 million shares of the Company’s outstanding common stock immediately following the closing of the PIPE Offering, representing approximately 27 % of CSI’s outstanding Common Stock after giving effect to the issuance of shares in the Merger, and approximately 18.8 million shares assuming exercise of all the warrants for cash, representing approximately 43 % of CSI’s outstanding common stock after giving effect to the issuance of shares in the Merger and exercise of the warrants.

The Series A Convertible Preferred Stock and warrants will have anti-dilution provisions that would increase the number of shares issuable upon conversion or exercise, and lower the conversion or exercise price, if CSI issues equity securities at a price less than the conversion or exercise price at the time of such issuance.

The securities purchase agreement also prohibits the combined company from conducting a new equity offering within 30 days of the closing, gives the PIPE Investors in the aggregate the right to purchase up to 25 % of the equity securities in future CSI-Pineapple offerings within one year of closing and requires 30 -day lock-up agreements of CSI common stock by certain CSI-Pineapple officers, directors and major shareholders following the closing.

In connection with the transaction, CSI has agreed to file a registration statement on behalf of the PIPE Investors allowing them to resell the common stock into which the Series A Convertible Preferred Stock is convertible and the warrants are exercisable immediately after issuance.

Closing of the PIPE Offering is also subject to the effectiveness of this registration statement and other customary closing conditions.

Other contingencies:

In the ordinary course of business,

the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims.

Company management

is not aware of any outstanding or pending legal actions or claims that would materially affect the Company’s financial position,

results of operations, or cash flows.

NOTE 11 –

STOCK COMPENSATION

The Company is aware of two lawsuits that have been filed on behalf of purported CSI shareholders relating to the registration statement on S-4 that we filed on November 12, 2021 (“Registration Statement”) in connection with the Pineapple Merger Transaction, among other matters.

The first complaint was filed on December 13, 2021 by Bashir Rivera in the United States District Court for the Southern District of New York and is captioned Rivera v.

Communications Systems, Inc., et al.

1:21-cv-10637-NRB.

The second complaint was filed on December 28, 2021 by Allen Chaidez in the United States District Court for the Eastern District of New York and is captioned Chaidez v.

Communications Systems, Inc., et al.

1:21-cv-07155-MKB-VMS.

The Rivera action was subsequently voluntarily dismissed on February 24, 2022.

Both complaints name CSI and all of its current directors as defendants.

Both complaints allege violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and claim that the Registration Statement omits material information with respect to the Pineapple Merger Transaction.

The plaintiffs in the actions purport to seek equitable relief and damages.

Additionally, CSI has received seven letters from individuals purporting to be shareholders of the Company (which we refer to collectively as the “Demands”) which also generally allege that the Registration Statement omits material information with respect to the Pineapple Merger Transaction.

In addition, one of the Demands seeks certain books and records of the Company.

The Company intends to vigorously defend the lawsuits and Demands.

Further, we have vigorously denied, and continues vigorously to deny, that we have committed or aided and abetted in the commission of any violation of law or duties or engaged in any of the wrongful acts that were alleged in the Rivera or Chaidez complaints and the Demands.

CSI is subject to claims and lawsuits in the ordinary course of business.

From time to time, the Company brings suit against others to enforce contract rights or property rights, or to collect debts in the ordinary course of business.

Management believes that the resolution or settlement of any pending litigation will not have a material adverse effect on the results of operations or liquidity of the Company.

NOTE 11 – STOCK COMPENSATION

2011 Executive Incentive Compensation Plan

On March 28, 2011 the Board adopted and on May 19, 2011 the

Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”).

The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options

(incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred

stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash.

The 2011 Incentive

Plan, as amended, allows the issuance of up to 2,500,000 shares of common stock.

During 2020, stock options covering 191,301 shares were awarded

to key executive employees and non-employee directors, which options expire seven years from the date of award and generally vest

25% each year beginning one year after the date of award.

The Company also granted deferred stock awards of 89,131 shares to key

employees during 2020 under the Company’s long-term incentive plan for the 2020 to 2022 period.

awards vest over three years with the first vesting date being May 6, 2021.

At December 31, 2020, 431,032 shares have been issued under

the 2011 Incentive Plan, 1,445,885 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted

stock units, and 623,083 shares remained available for future issuance under the 2011 Incentive Plan.

On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”).

The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash.

The 2011 Incentive Plan, as amended, allows the issuance of up to 2,500,000 shares of common stock.

At December 31, 2021, 1,425,008 shares have been issued under the 2011 Incentive Plan, there are no shares subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 1,074,992 shares are eligible for grant under future awards.

The closing of the E&S Sale Transaction on August 2, 2021 constituted a “Change in Control” as defined in the Company’s 2011 Incentive Plan.

In accordance with the determinations and approvals of the Compensation Committee, effective on August 1, 2021, each Incentive Award granted and outstanding under the 2011 Incentive Plan and not otherwise forfeited or expired in accordance with its terms was fully vested and exercisable and any restrictions lapsed.

After giving effect to such acceleration and vesting, on the August 2, 2021 closing date:

 All then-outstanding restricted stock units (RSUs”) were settled by exchanging them for the equivalent number of shares of the Company’s common stock specified in the respective RSU award agreements, with the shares of the Company’s common stock issued on settlement of the RSUs being issued and outstanding as of the closing date.

 All then-outstanding stock options having an exercise price less than the Fair Market Value (as defined in the 2011 Incentive Plan) on the closing date were settled by exchanging the options for a “net” number of shares of the Company’s common stock as if exercised on a net or cashless basis as provided in the 2011 Incentive Plan (for administrative convenience, rounded up to the next whole share), with the net shares of the Company’s common stock issued on settlement of these stock options being issued and outstanding as of the closing date.

 Following the disposition of the outstanding RSUs and stock options as described above, these Incentive Awards were terminated and cancelled as of the closing date.

 All then-outstanding stock options having an exercise price equal to or greater than the Fair Market Value on the closing date were terminated and cancelled as of the closing date without any payment therefor.

 Due to conditions of the Pineapple merger agreement, no additional awards have been made under the 2011 Incentive Plan following August 2, 2021.

Stock Options Outstanding

The following table summarizes changes in the number of outstanding

stock options under the Director Plan, Stock Plan and the 2011 Incentive Plan during the two years ended December 31, 2020.

The following table summarizes changes in the number of outstanding stock options under the Director Plan, Stock Plan and the 2011 Incentive Plan during the two years ended December 31, 2021.

Weighted average

2 unchanged sentences

contractual term

Outstanding –

December 31, 2018

Outstanding –

December 31, 2019

Outstanding –

December 31, 2020

Outstanding – December 31, 2019

Outstanding – December 31, 2020

Outstanding – December 31, 2021

Exercisable at December 31, 2021

Expected to vest December 31, 2021

The fair value of awards issued under the Company’s stock

option plan is estimated at grant date using the Black-Scholes option-pricing model.

The following table displays the assumptions

used in the model.

Ended December 31

The fair value of awards issued under the Company’s 2011 Incentive Plan is estimated at grant date using the Black-Scholes option-pricing model.

The following table displays the assumptions used in the model.

No awards were granted in 2021.

Year Ended December 31

Expected volatility

2 unchanged sentences

Dividend yield

Total unrecognized compensation expense was $222,000 as of December

31, 2020, which is expected to be recognized over the next 2.8 years.

The aggregate intrinsic value of all outstanding options,

exercisable options, and options expected to vest ( the amount by which the market price of

the stock on the last day of the period exceeded the market price of the stock on the date of grant) was $437,000 based on the

Company’s stock price at December 31, 2020.

The intrinsic value of options exercised during the year was $18,000 in 2020

and $380,000 in 2019.

Because all outstanding options were either vested and exercised or cancelled, the aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at December 31, 2021 was $ 0 .

The intrinsic value of options exercised during the year was $ 1,961,000 in 2021 and $ 18,000 in 2020.

Net cash proceeds from the exercise of all stock options were $ 0 in 2021 and 2020.

The following table summarizes

the status of stock options outstanding at December 31, 2020:

Weighted Average

Range of Exercise Prices

$2.50 to $4.99

$5.00 to $7.49

$7.50 to $9.99

$10.00 to $12.49

$12.50 to $14.15

The Company receives an income tax benefit related to the gains

received by officers and key employees who make disqualifying dispositions of stock received on exercise of qualified incentive

stock options and on non-qualified options.

The Company receives an income tax benefit related to the gains received by officers and key employees who make disqualifying dispositions of stock received on exercise of qualified incentive stock options and on non-qualified options.

The amount of tax benefit received by the Company was $ 0 in both 2021 and 2020.

tax benefit amounts have been credited to additional paid-in capital.

The tax benefit amounts have been credited to additional paid-in capital.

Deferred Stock Outstanding

The following table summarizes the changes in the number of

deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period from December 31, 2018 to December 31, 2020:

The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period from December 31, 2019 to December 31, 2021:

Weighted Average

Outstanding –

December 31, 2018

Outstanding –

December 31, 2019

Outstanding –

December 31, 2020

The grant date fair value is calculated based on the Company’s

closing stock price as of the grant date.

As of December 31, 2020, the total unrecognized compensation expense related to the deferred

stock shares was $347,000 and is expected to be recognized over a weighted-average period of 2.1 years.

Outstanding – December 31, 2019

Outstanding – December 31, 2020

Outstanding – December 31, 2021

The grant date fair value is calculated based on the Company’s closing stock price as of the grant date.

Compensation Expense

Share-based compensation expense is recognized based on the

fair value of awards granted over the vesting period of the award.

Share-based compensation expense recognized for 2020 and 2019

was $463,000 and $413,000 before income taxes and $366,000 and $326,000 after income taxes, respectively.

Share-based compensation

expense is recorded as a part of selling, general and administrative expenses.

Share-based compensation expense is recognized based on the fair value of awards granted over the vesting period of the award.

Share-based compensation expense recognized for 2021 and 2020 was $ 559,000 and $ 463,000 before income taxes and $ 442,000 and $ 366,000 after income taxes, respectively.

There was no unrecognized compensation expense for the Company’s plans at December 31, 2021 due to the acceleration of all outstanding equity awards as part of the E&S Sale Transaction.

Share-based compensation expense is recorded as a part of selling, general and administrative expenses.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”),

employees are able to acquire shares of common stock at 85% of the price at the end of each current quarterly plan term.

recent term ended December 31, 2020.

The ESPP is considered compensatory under current rules.

At December 31, 2020, after giving

effect to the shares issued as of that date, 68,843 shares remain available for purchase under the ESPP.

Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85 % of the price at the end of each current quarterly plan term.

The ESPP is considered compensatory under current Internal Revenue Service rules.

At December 31, 2021, 59,303 shares remain available for purchase under the ESPP.

The ESPP was suspended effective March 31, 2021 due to conditions of the Pineapple merger agreement.

Employee Stock Ownership Plan (ESOP)

All eligible employees of the Company participate in the ESOP

after completing one year of service.

Contributions are allocated to each participant based on compensation and vest 20% after

two years of service and incrementally thereafter, with full vesting after six years.

At December 31, 2020, the ESOP held 706,287

shares of the Company’s common stock, all of which have been allocated to the accounts of eligible employees.

Contributions

to the plan are determined by the Board of Directors and can be made in cash or shares of the Company’s stock.

The 2020 ESOP

contribution was $328,263 for which the Company issued 71,830 shares in March 2021.

The 2019 ESOP contribution was $407,584 for

which the Company issued 66,059 shares in 2020.

NOTE 12 –

In August 2019, the Company announced the adoption of a $2.0

million stock repurchase program running through the end of 2020.

Under the stock repurchase program, repurchases can be made from

time to time using a variety of methods, including through open market purchases or in privately negotiated transactions in compliance

with the rules of the United States Securities and Exchange Commission and other applicable legal requirements.

This new $2.0 million

repurchase program replaces a stock repurchase program that the Company had adopted in 2008.

At December 31, 2020, there remained

$341,000 under this repurchase program.

All eligible employees of the Company participate in the ESOP after completing one year of service.

Contributions are allocated to each participant based on compensation and vest 20 % after two years of service and incrementally thereafter, with full vesting after six years .

At December 31, 2021, the ESOP held 545,631 shares of the Company’s common stock, all of which have been allocated to the accounts of eligible employees.

Contributions to the plan are determined by the Board of Directors and can be made in cash or shares of the Company’s stock.

The 2020 ESOP contribution was $ 329,968 for which the Company issued 72,203 shares in 2021.

Due to conditions of the Pineapple Merger Agreement, no additional contributions will be made to the ESOP.

NOTE 12 – COMMON STOCK

In August 2019, the Company announced the adoption of a $ 2.0 million stock repurchase program running through the end of 2020.

Under the stock repurchase program, repurchases can be made from time to time using a variety of methods, including through open market purchases or in privately negotiated transactions in compliance with the rules of the United States Securities and Exchange Commission and other applicable legal requirements.

This new $ 2.0 million repurchase program replaces a stock repurchase program that the Company had adopted in 2008.

At December 31, 2021, there remained $ 341,000 under this repurchase program.

NOTE 13 - INCOME TAXES

Income tax (benefit) expense from continuing operations consists

of the following:

Ended December 31

Income tax (benefit) expense from continuing operations consists of the following:

Year Ended December 31

Current year income taxes (benefit):

1 unchanged sentence

Income tax expense (benefit)

The Company’s Austin Taylor Communications, Ltd.

operated in the United Kingdom (U.K.) and is subject to U.K.

The Company’s Austin Taylor Communications, Ltd.

unit operated in the United Kingdom (U.K.) and is subject to U.K.

rather than U.S.

income taxes.

Austin Taylor had no activity in 2020

At the end of 2020, Austin Taylor’s net operating loss carry-forward was $7,462,000.

The Company remains uncertain

whether it will be able to generate the future income needed to realize the tax benefit of the carry-forward.

Accordingly, the

Company has continued to maintain its deferred tax valuation allowance against any potential carry-forward benefit from Austin

Net2Edge, Ltd., formally known as Transition Networks EMEA,

Ltd., operates in the U.K.

Austin Taylor had no activity in 2021 and 2020.

At the end of 2021, Austin Taylor’s net operating loss carry-forward was $ 7,462,000 .

The Company remains uncertain whether it will be able to generate the future income needed to realize the tax benefit of the carry-forward.

Accordingly, the Company has continued to maintain its deferred tax valuation allowance against any potential carry-forward benefit from Austin Taylor.

Net2Edge, Ltd., formally known as Transition Networks EMEA, Ltd., operates in the U.K.

and is subject to U.K.

2 unchanged sentences

Net2Edge, Ltd.

had pretax losses of $955,000 and

$1,519,000 in 2020 and 2019, respectively.

At the end of 2020, Net2Edge, Ltd.’s net operating loss carry-forward was $9,700,000,

of which a full valuation allowance is recorded.

In 2007, Transition Networks China began operations in China

and is subject to Chinese taxes rather than U.S.

income taxes.

Transition Networks China had no activity in 2020 and 2019.

end of 2020, Transition Networks China’s net operating loss carry-forward was $0.

Transition Networks China ceased operations in

2014 and incurred minor non-operating expenditures in 2015 to close the operations.

As of 2016, Transition Networks China no longer

has any operational activity.

Suttle Costa Rica operated in Costa Rica and was subject to

Costa Rica income taxes.

As of December 31, 2020, the amount of unremitted earnings outside of the United States was not significant

to the Company’s liquidity and was available to fund investments abroad.

The Company closed its Costa Rica facility in 2017

and no longer has any operational activity in Costa Rica.

Suttle Costa Rica had no activity in 2020 and 2019.

At the end of 2020,

Suttle Costa Rica’s net operating loss carry-forward was $0.

The provision for income taxes for continuing operations varied

from the federal statutory tax rate as follows:

Ended December 31

had pretax losses of $ 120,000 and $ 955,000 in 2021 and 2020, respectively.

At the end of 2021, Net2Edge, Ltd.’s net operating loss carry-forward was $ 10,195,000 .

Net2Edge was included in the E&S Sale Transaction, which resulted in all deferred balances being reduced to zero as of December 31, 2021.

The provision for income taxes for continuing operations varied from the federal statutory tax rate as follows:

Year Ended December 31

statutory rate

State income taxes, net of federal benefit

Foreign income taxes, net of foreign tax credits

Foreign income taxes, net of

foreign tax credits

Other nondeductible items

Effect of increase in uncertain tax positions

Change in valuation allowance

Effective tax rate

Deferred tax assets and liabilities as of December 31 related

to the following:

Deferred tax assets and liabilities as of December 31 related to the following:

Deferred tax assets:

3 unchanged sentences

Domestic net operating loss carry-forward

Long-term compensation plans

Capital loss carry-forward

Nonemployee director stock compensation

Other stock compensation

Intangible assets

Foreign net operating loss carry-forwards and credits

2 unchanged sentences

Valuation allowance

( 5,210,000 )

( 8,728,000 )

Net deferred tax assets

4 unchanged sentences

Total net deferred tax asset

The Company assesses available positive and negative evidence

to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.

A significant piece

of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ending December 31, 2020.

The Company assesses available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three -year period ending December 31, 2021.

This objective evidence limits the ability to consider other subjective evidence such as the projections for future growth.

the basis of this evaluation, as of December 31, 2020, a valuation allowance of $8,728,000 has been recorded to reflect the portion

of the deferred tax asset that is more likely to not be realized.

The amount of the deferred tax asset considered realizable, however,

could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective

negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence

such as the Company’s projections for growth.

At December 31, 2020, the Company has a federal net operating

loss carryforward from 2015 through 2020 activity of approximately $10,940,000 that is available to offset future taxable income

and begins to expire in 2035.

The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that

is available to offset future capital gains and expires in 2023.

During 2015, the Company engaged in a research and development

tax credit study for the tax years 2011 to 2014.

As a result of this study, the Company claimed $1,554,000 of federal and $1,024,000

of state research and development credits.

The Company amended prior year tax returns to claim these credits and offset prior year

On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $ 5,210,000 has been recorded to reflect the portion of the deferred tax asset that is more likely to not be realized.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company’s projections for growth.

At December 31, 2021, the Company has a federal net operating loss carryforward from 2015 through 2021 activity of approximately $ 10,008,000 that is available to offset future taxable income and begins to expire in 2035 .

This includes the removal of all Transition Networks’ net operating losses from prior years due to the E&S Sale Transaction in 2021.

During 2015, the Company engaged in a research and development tax credit study for the tax years 2011 to 2014.

As a result of this study, the Company claimed $ 1,554,000 of federal and $ 1,024,000 of state research and development credits.

The Company amended prior year tax returns to claim these credits and offset prior year taxes paid.

Credits not used to reduce taxes are available to be carried forward.

At December 31, 2020, the Company has an estimated

federal research and development credit carryforward of approximately $467,000 and a state research and development credit carryforward

of approximately $594,000.

The Company assesses uncertain tax positions in accordance with

Under this method, the Company must recognize the tax benefit

from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the

taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial statements from

these uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being

realized upon ultimate resolution.

The Company’s practice is to recognize interest and penalties related to income

tax matters in income tax expense.

Changes in the Company’s uncertain tax positions are summarized

Uncertain tax positions –

At December 31, 2021, the Company has an estimated federal research and development credit carryforward of approximately $ 220,000 and a state research and development credit carryforward of approximately $ 387,000 .

The Company assesses uncertain tax positions in accordance with ASC 740.

Under this method, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial statements from these uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.

Changes in the Company’s uncertain tax positions are summarized as follows:

Uncertain tax positions – January 1

Gross increases - current period tax positions

Uncertain tax positions –

December 31, 2020

Included in the balance of uncertain tax positions at December

31, 2020 are $115,000 of tax benefits that if recognized would affect the tax rate.

The Company’s unrecognized tax benefits

will be reduced by $0 in the next twelve months due to statute of limitations expirations.

There are no other expected significant

changes in the Company’s uncertain tax positions in the next twelve months.

The Company’s income tax liability accounts

included accruals for interest and penalties of $0 at December 31, 2020.

The Company’s 2020 income tax expense decreased

by $0 due to net decreases for accrued interest and penalties.

The Company’s federal and state tax returns and tax returns

it has filed in Costa Rica and the United Kingdom are open for review going back to the 2017 tax year.

NOTE 14 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND

MAJOR CUSTOMERS

Following the acquisition of Ecessa during the second quarter

of 2020 and the merging of certain operations, the Company classifies its remaining businesses into two segments as follows:

● Electronics & Software:

designs, develops and sells

Intelligent Edge solutions that provide connectivity and power through PoE products and actionable intelligence to end devices

in an IoT ecosystem through embedded and cloud-based management software.

In addition, this segment continues to generate revenue

from its traditional products consisting of, media converters, NICs, and Ethernet switches that offer the ability to affordably

integrate the benefits of fiber optics into any data network;

● Services & Support:

provides technology solutions

that address prevalent IT challenges, including network resiliency, security products and services, network virtualization, and

cloud migrations, IT managed services, wired and wireless network design and implementation, and converged infrastructure configuration,

deployment and management, and SD-WAN network devices.

Management has chosen to organize the enterprise and disclose

reportable segments based on products and services.

Uncertain tax positions – December 31, 2021

Included in the balance of uncertain tax positions at December 31, 2021 are $ 113,000 of tax benefits that if recognized would affect the tax rate.

The Company’s unrecognized tax benefits will be reduced by $ 0 in the next twelve months due to statute of limitations expirations.

There are no other expected significant changes in the Company’s uncertain tax positions in the next twelve months.

The Company’s income tax liability accounts included accruals for interest and penalties of $ 0 at December 31, 2021.

The Company’s 2021 income tax expense decreased by $ 0 due to net decreases for accrued interest and penalties.

The Company’s federal and state tax returns and tax returns it has filed in Costa Rica and the United Kingdom are open for review going back to the 2018 tax year.

NOTE 14 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS

The Company classifies its business operations into one segment, the Services & Support (“S&S”) segment.

Management has chosen to organize the enterprise and disclose reportable segments based on products and services.

Intersegment revenues are eliminated upon consolidation.

“Other”

includes non-allocated corporate overhead costs.

As a result of our treatment of Suttle as discontinued operations, “Other”

includes amounts previously allocated to Suttle that do not meet the criteria to be included in income from discontinued operations.

Electronics & Software manufactures its products in Asia

and the United States and makes sales in both the U.S.

and international markets.

“Other” includes non-allocated corporate overhead costs.

As a result of our treatment of Suttle and the E&S Segment as discontinued operations, “Other” includes amounts previously allocated to Suttle and the E&S Segment that do not meet the criteria to be included in income from discontinued operations.

Services & Support operates in the U.S.

primarily makes sales in the U.S.

Net long-lived assets held in foreign countries were approximately $49,000 and $112,000 at December

31, 2020 and 2019, respectively.

and primarily makes sales in the U.S.

Consolidated sales to U.S.

customers were approximately

87% and 74% of sales from continuing operations in 2020 and 2019 respectively.

In 2020, sales to two of Electronics & Software’s

customers accounted for 18.7% and 17.3% of consolidated sales and one of Services & Support’s customers accounted for

10.3% of consolidated sales.

In 2019, sales to two of Electronics & Software’s customers accounted for 21.2% and 16.2%

of consolidated sales.

At December 31, 2020, Electronics & Software had one customer that made up

17% of consolidated accounts receivable and Services & Support had one customer that made up 38% of accounts receivable.

December 31, 2019, Electronics & Software had two customers that made up 45% and 17% of consolidated accounts receivable.

Information concerning the Company’s operations in the

various segments for the years ended December 31, 2020 and 2019 is as follows:

Electronics &

customers were approximately 98 % and 99 % of sales from continuing operations in 2021 and 2020 respectively.

In 2021, no customers had sales greater than 10% of consolidated sales.

In 2020, sales to one customer accounted for 54 % consolidated sales.

At December 31, 2021, Services & Support had one customer that made up 53 % of consolidated accounts receivable.

At December 31, 2020, Services & Support had one customer that made up 87 % of consolidated accounts receivable.

Information concerning the Company’s operations in the various segments for the years ended December 31, 2021 and 2020 is as follows:

Cost of sales

Selling, general and administrative expenses

Acquisition costs

Operating income (loss)

Other income (expense)

Income (loss) from continuing operations before tax

Selling, general and

administrative expenses

Amortization expense

Transaction costs

Impairment loss

Restructuring expense

Operating (loss) income

( 7,743,000 )

( 8,172,000 )

(Loss) income from continuing operations before tax

( 7,737,000 )

( 8,154,000 )

Depreciation and amortization

Capital expenditures

Electronics &

Cost of sales

Selling, general and administrative expenses

Selling, general and

administrative expenses

Amortization expense

Transaction costs

Operating income (loss)

Other income (expense)

( 5,935,000 )

( 5,625,000 )

Other (expense) income

Income (loss) from continuing operations before tax

( 4,971,000 )

( 4,693,000 )

Depreciation and amortization

Capital expenditures

NOTE 15 –

FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to

sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs

to the valuation as of the measurement date:

Level 1 –

Observable inputs that reflect unadjusted quoted

prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Level 2 –

Observable inputs such as quoted prices for

similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated

by observable market data.

The types of assets and liabilities included in Level 2 are typically either comparable to actively

traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities,

or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

Level 3 –

Significant inputs to pricing that have little

or no observability as of the reporting date.

The types of assets and liabilities included in Level 3 are those with inputs requiring

significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair

value of financial instruments.

Financial assets and liabilities measured at fair value on a

recurring basis as of December 31, 2020 and 2019, are summarized below:

NOTE 15 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data.

The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date.

The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020, are summarized below:

December 31, 2021

Total Fair Value

Cash equivalents:

1 unchanged sentence

Short-term investments:

Commercial Paper

Corporate Notes/Bonds

2 unchanged sentences

Convertible Debt

Current Liabilities:

Accrued Consideration

December 31, 2020

Total Fair Value

Cash equivalents:

4 unchanged sentences

Long-term investments:

Corporate Notes/Bonds

Convertible Debt

The estimated fair value of contingent consideration as of December

31, 2020 was $550,000, as noted above.

The estimated fair value is considered a level 3 measurement because the probability weighted

discounted cash flow methodology used to estimate fair value includes the use of significant unobservable inputs, primarily the

contractual contingent consideration revenue targets and assumed probabilities.

There was no change in the estimated contingent

consideration during the year ended December 31, 2020.

In March 2021, the Company paid the full amount of the $550,000 contingent

consideration to the Receiver.

We record transfers between levels of the fair value hierarchy,

if necessary, at the end of the reporting period.

Current Liabilities:

Accrued Consideration

The estimated fair value of contingent consideration as of December 31, 2020 was $ 550,000 , as noted above.

The estimated fair value is considered a level 3 measurement because the probability weighted discounted cash flow methodology used to estimate fair value includes the use of significant unobservable inputs, primarily the contractual contingent consideration revenue targets and assumed probabilities.

The Company paid the full amount of the contingent consideration during the first quarter of 2021 and there was no liability at December 31, 2021.

We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period.

There were no transfers between levels during 2021 and 2020.

NOTE 16 –

GENERAL COMMITMENTS

On August 2, 2018, the Company entered into a purchase agreement

with Launch Properties, LLC for the sale of the Company’s building located at 10900 Red Circle Drive, Minnetonka, MN for

The building currently includes the Company’s corporate administrative offices, as well as some operations for

Transition Networks and JDL Technologies.

This agreement was terminated on July 28, 2020 and earnest money totaling $225,000 was

transferred to the Company and recognized as other income in the accompanying condensed consolidated statements of income (loss)

and comprehensive income (loss) for the year ended December 31, 2020.

The Company is reviewing options to continue to use or sell

the property.

NOTE 17 –

SUBSEQUENT EVENTS

On March 1, 2021, the Company entered into

an Agreement and Plan of Merger with Helios Merger Co.

and Pineapple Energy LLC pursuant to which Pineapple would become a wholly

owned subsidiary of the Company (the “Merger”).

In connection with the Merger, CSI intends to pursue dispositions of

its existing assets and businesses prior to the closing of the Merger.

To the extent these dispositions occur, CSI expects to declare

a cash dividend that distributes a portion of the proceeds from these dispositions to its shareholders as of a pre-closing record

Following the closing, CSI will use commercially

reasonable efforts to complete the dispositions of these assets as soon as reasonably practicable (and, in any event, within 18

months of the closing).

Proceeds that become available from the dispositions that occur following the closing of the Merger will

be distributed pro rata to the legacy shareholders pursuant to the contingent value rights agreement described above.

continue to support these existing business lines as it pursues new owners for these businesses.

In connection with the execution of the Merger agreement, the

Company announced that CSI and Pineapple Energy were exploring equity financing through a private placement

that would close in connection with the closing of Merger, with proceeds to be used by the combined company to finance additional

acquisitions and working capital needs of the combined company.

(b) SUPPLEMENTAL FINANCIAL INFORMATION

Quarterly Operating Results

(in thousands except per share amounts)

Operating (loss) income from continuing operations

Net (loss) income from continuing operations

Net income (loss) from discontinued operations

Net income (loss)

Basic net (loss) income per share

Continuing operations

Discontinued operations

Diluted net (loss) income per share

Continuing operations

Discontinued operations

Operating (loss) income from continuing operations

Net (loss) income from continuing operations

Net income from discontinued operations

Basic net (loss) income per share

Continuing operations

Discontinued operations

Diluted net (loss) income per share

Continuing operations

Discontinued operations

The company recorded a gain of $2,161,000 on the sale inventory,

working capital, and certain capital equipment to Primex in the first quarter of 2020.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

NOTE 16 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date of this filing.

We do not believe there are any material subsequent events other than those disclosed in the footnotes to these financial statements that require further disclosure.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data