SUNation Energy, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF MANAGEMENT 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 23 ) 40 CONSOLIDATED BALANCE SHEETS 42 CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) 43 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 44 CONSOLIDATED STATEMENTS OF CASH FLOWS 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 46 ‎ 38 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 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. Lacey /s/ Mark D. Fandrich Roger H.D. Lacey Mark D. Fandrich Interim Chief Executive Officer Chief Financial Officer ‎ 39 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, 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 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. Critical Audit Matters 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 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. 40 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 We have served as the Company's auditor since 2017. Minneapolis, Minnesota March 14, 2022 ‎ 41 COMMUNICATIONS SYSTEMS, INC. AND SUBSIDI ARIES CONSOLIDATED BALANCE SHEETS ASSETS December 31 December 31 2021 2020 CURRENT ASSETS: Cash and cash equivalents $ 3,491,160 $ 12,789,975 Investments 135,240 2,759,024 Trade accounts receivable, less allowance for doubtful accounts of $ 52,000 and $ 14,000 , respectively 1,801,860 4,402,023 Inventories, net 194,506 136,264 Prepaid income taxes 3,374 35,948 Other current assets 901,755 556,953 Current assets held for sale — 15,078,066 TOTAL CURRENT ASSETS 6,527,895 35,758,253 PROPERTY, PLANT AND EQUIPMENT, net 140,762 304,758 OTHER ASSETS: Investments 3,061,843 7,109,212 Goodwill 2,086,393 2,086,393 Right of use asset 159,643 284,251 Intangible assets 2,330,073 2,775,361 Other assets 173,953 171,619 Noncurrent assets held for sale 5,593,446 7,066,478 TOTAL OTHER ASSETS 13,405,351 19,493,314 TOTAL ASSETS $ 20,074,008 $ 55,556,325 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 798,457 $ 709,283 Accrued compensation and benefits 1,024,165 1,531,595 Operating lease liability 117,527 127,243 Other accrued liabilities 33,924 318,650 Accrued consideration — 550,000 Dividends payable — 16,147 Deferred revenue 635,894 456,912 Current liabilities held for sale — 3,727,821 TOTAL CURRENT LIABILITIES 2,609,967 7,437,651 LONG TERM LIABILITIES: Long-term compensation plans — 116,460 Operating lease liability 50,170 167,697 Deferred revenue 396,360 310,179 Long term liabilities held for sale — 29,611 TOTAL LONG-TERM LIABILITIES 446,530 623,947 COMMITMENTS AND CONTINGENCIES (Footnote 10) STOCKHOLDERS' EQUITY Preferred stock, par value $ 1.00 per share; 3,000,000 shares authorized; none issued Common stock, par value $. 05 per share; 30,000,000 shares authorized; 9,720,627 and 9,321,927 shares issued and outstanding, respectively 486,031 466,096 Additional paid-in capital 44,878,533 43,572,114 (Accumulated deficit) retained earnings ( 28,349,336 ) 4,135,284 Accumulated other comprehensive loss 2,283 ( 678,767 ) TOTAL STOCKHOLDERS' EQUITY 17,017,511 47,494,727 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,074,008 $ 55,556,325 The accompanying notes are an integral part of the consolidated financial statements. ‎ 42 COMMUNICATIONS SYSTEMS, INC. AND SUB SIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) Year Ended December 31 2021 2020 Sales $ 7,010,060 $ 8,079,562 Cost of sales 4,576,256 5,762,650 Gross profit 2,433,804 2,316,912 Operating expenses: Selling, general and administrative expenses 7,127,370 7,052,198 Amortization expense 456,766 204,639 Transaction costs 2,347,203 684,856 Impairment loss 206,261 — Restructuring expense 467,827 — Total operating expenses 10,605,427 7,941,693 Operating loss from continuing operations ( 8,171,623 ) ( 5,624,781 ) Other income (expenses): Investment and other income 18,712 672,043 Gain on sale of assets 7,075 288,569 Interest and other expense ( 8,023 ) ( 28,514 ) Other income, net 17,764 932,098 Operating loss from continuing operations before income taxes ( 8,153,859 ) ( 4,692,683 ) Income tax expense 24,575 14,566 Net loss from continuing operations ( 8,178,434 ) ( 4,707,249 ) Net income from discontinued operations, net of tax 11,152,081 4,535,591 Net income (loss) 2,973,647 ( 171,658 ) Other comprehensive income (loss), net of tax: Unrealized (losses)/gains on available-for-sale securities ( 18,526 ) 9,249 Foreign currency translation adjustment 699,576 9,648 Total other comprehensive income 681,050 18,897 Comprehensive income (loss) $ 3,654,697 $ ( 152,761 ) Basic net (loss) income per share: Continuing operations $ ( 0.86 ) $ ( 0.51 ) Discontinued operations 1.17 0.49 $ 0.31 $ ( 0.02 ) Diluted net (loss) income per share: Continuing operations $ ( 0.85 ) $ ( 0.51 ) Discontinued operations 1.16 0.49 $ 0.31 $ ( 0.02 ) Weighted Average Basic Shares Outstanding 9,537,857 9,322,672 Weighted Average Dilutive Shares Outstanding 9,675,519 9,322,672 Dividends declared per share $ 3.50 $ 0.04 The accompanying notes are an integral part of the consolidated financial statements. ‎ 43 COMMUNICATIONS SYSTEMS, INC. AND SU BSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Retained Accumulated Additional Earnings Other Common Stock Paid-in (Accumulated Comprehensive Shares Amount Capital Deficit) Income (Loss) Total BALANCE AT DECEMBER 31, 2019 9,252,749 $ 462,637 $ 42,977,914 $ 4,649,395 $ ( 697,664 ) $ 47,392,282 Net loss — — — ( 171,658 ) — ( 171,658 ) Issuance of common stock under Employee Stock Purchase Plan 20,279 1,014 93,882 — — 94,896 Issuance of common stock to Employee Stock Ownership Plan 66,059 3,303 404,281 — — 407,584 Issuance of common stock under Executive Stock Plan 65,952 3,298 20,720 — — 24,018 Share based compensation — — 463,274 — — 463,274 Other share retirements ( 83,112 ) ( 4,156 ) ( 387,957 ) 37,213 — ( 354,900 ) Shareholder dividends ($ 0.04 per share) — — — ( 379,666 ) — ( 379,666 ) Other comprehensive income — — — — 18,897 18,897 BALANCE AT DECEMBER 31, 2020 9,321,927 466,096 43,572,114 4,135,284 ( 678,767 ) 47,494,727 Net income — — — 2,973,647 — 2,973,647 Issuance of common stock under Employee Stock Purchase Plan 9,540 477 48,532 — — 49,009 Issuance of common stock to Employee Stock Ownership Plan 72,203 3,610 326,358 — — 329,968 Issuance of common stock under Executive Stock Plan 993,977 49,699 3,714,658 — — 3,764,357 Share based compensation — — 559,397 — — 559,397 Other share retirements ( 677,020 ) ( 33,851 ) ( 3,342,526 ) ( 1,436,068 ) — ( 4,812,445 ) Shareholder dividends ($ 3.50 per share) — — — ( 34,022,199 ) — ( 34,022,199 ) Other comprehensive income — — — — 681,050 681,050 BALANCE AT DECEMBER 31, 2021 9,720,627 $ 486,031 $ 44,878,533 $ ( 28,349,336 ) $ 2,283 $ 17,017,511 The accompanying notes are an integral part of the consolidated financial statements. ‎ 44 COMMUNICATIONS SYSTEMS, INC. AND SU BSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,973,647 $ ( 171,658 ) Net income from discontinued operations, net of tax 11,152,081 4,535,591 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 821,977 808,038 Share based compensation 559,397 463,274 Deferred taxes — 9,534 Impairment loss 606,089 — Gain on sale of assets ( 7,075 ) ( 284,064 ) Changes in assets and liabilities: Trade accounts receivables, net 2,555,334 ( 3,883,662 ) Inventories, net ( 58,241 ) 14,107 Prepaid income taxes 32,575 37,046 Other assets ( 330,557 ) 28,887 Accounts payable 89,234 283,686 Accrued compensation and benefits ( 293,921 ) 44,718 Other accrued liabilities ( 22,200 ) 107,702 Net cash used in operating activities - continuing operations ( 4,225,822 ) ( 7,077,983 ) Net cash (used in) provided by operating activities - discontinued operations ( 386,572 ) 2,394,454 Net cash used in operating activities ( 4,612,394 ) ( 4,683,529 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 34,842 ) ( 169,100 ) Acquisition of business, net of cash acquired — ( 4,797,919 ) Purchases of investments — ( 18,665,534 ) Proceeds from the sale of fixed assets 862,131 432,000 Proceeds from the sale of investments 6,091,367 18,506,198 Net cash provided by (used in) investing activities - continuing operations 6,918,656 ( 4,694,355 ) Net cash provided by investing activities - discontinued operations 23,625,453 8,624,586 Net cash provided by investing activities 30,544,109 3,930,231 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 34,038,346 ) ( 563,882 ) Proceeds from issuance of common stock, net of shares withheld 3,813,366 118,914 Payment of contingent consideration related to acquisition ( 550,000 ) — Purchase of common stock ( 4,812,445 ) ( 354,900 ) Net cash used in financing activities ( 35,587,425 ) ( 799,868 ) EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 54,386 38,140 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 13,092,484 14,607,510 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR $ 3,491,160 $ 13,092,484 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes refunded $ ( 7,514 ) $ ( 27,722 ) Interest paid 8,343 26,327 Dividends declared not paid — 16,147 Operating right of use assets obtained in exchange for lease obligations — 208,650 Accrued consideration — 550,000 The accompanying notes are an integral part of the consolidated financial statements. 45 COMMUNICATIONS SYSTEMS, INC. AND SUBSID IARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2021 and 2020 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of business: Communications Systems, Inc. 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. 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. 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. As of December 31, 2021, the Company had $ 3,491,000 in cash and cash equivalents. 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: 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: 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: 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 $ 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. 46 Goodwill and Other Intangible Assets: 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. Accumulated other comprehensive loss: 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 $ ( 709,000 ) $ 11,000 $ ( 698,000 ) Net current period change 9,000 10,000 19,000 December 31, 2020 $ ( 700,000 ) $ 21,000 $ ( 679,000 ) Net current period change 700,000 ( 19,000 ) 681,000 December 31, 2021 $ — $ 2,000 $ 2,000 Revenue recognition : 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. 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 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 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: 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. 47 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. 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. 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: None. 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. 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. 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. 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. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. 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 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, 2021 and 2020 were $ 25,000 and $ 52,000 , respectively. 48 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. 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. 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. 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 2021 2020 Financial $ 1,734,000 $ 633,000 Healthcare 1,012,000 887,000 Education 273,000 4,483,000 Other commercial clients 3,991,000 2,075,000 CSI IT operations 473,000 699,000 $ 7,483,000 $ 8,777,000 Services & Support Revenue ‎ by Type 2021 2020 Project & product revenue $ 1,168,000 $ 5,120,000 Services & support revenue 6,315,000 3,657,000 $ 7,483,000 $ 8,777,000 Contract Balances 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 49 $ 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. 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 2021 2020 Cash paid for operating leases $ 135,000 $ 100,000 Right-of-use assets obtained in exchange for new operating lease obligations (1) $ — $ 209,000 As of December 31 2021 2020 Weighted-average remaining lease term 1.5 years 2.4 years Weighted-average discount rate 3.5 % 3.2 % (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: 2022 $ 122,000 2023 47,000 2024 4,000 Total lease payments 173,000 Less imputed interest ( 5,000 ) Total operating lease liabilities $ 168,000 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. 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 50 $ 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 $ — $ 303,000 Trade accounts receivable, net — 5,775,000 Inventories, net — 8,561,000 Other current assets — 439,000 Total current assets $ — $ 15,078,000 Property, plant, and equipment, net $ 5,593,000 $ 6,937,000 Right of use asset — 129,000 Total noncurrent assets $ 5,593,000 $ 7,066,000 Total assets held for sale $ 5,593,000 $ 22,144,000 Accounts payable $ — $ 1,669,000 Accrued compensation and benefits — 767,000 Operating lease liability — 86,000 Other accrued liabilities — 1,206,000 Total current liabilities $ — $ 3,728,000 Operating lease liability $ — $ 30,000 Total noncurrent liabilities $ — $ 30,000 Total liabilities held for sale $ — $ 3,758,000 The financial results of the discontinued operations are as follows: Year Ended December 31 2021 2020 Sales $ 20,478,000 $ 39,276,000 Cost of sales 11,774,000 22,774,000 Selling, general and administrative expenses 6,795,000 12,925,000 Transaction costs 2,058,000 — Impairment loss 101,000 — Restructuring expenses 1,343,000 960,000 Gain on sale of assets ( 13,451,000 ) ( 2,247,000 ) Foreign currency translation loss 642,000 — Other expense 61,000 322,000 Operating income before income taxes 11,155,000 4,542,000 Income tax expense 3,000 6,000 Income from discontinued operations $ 11,152,000 $ 4,536,000 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. The 51 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. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been allocated as follows: May 14, 2020 Current assets $ 1,101,000 Property, plant, and equipment 127,000 Other long-term assets 421,000 Intangible assets 2,260,000 Goodwill 1,341,000 Total assets 5,250,000 Total liabilities 608,000 Net assets acquired $ 4,642,000 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. 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. 52 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 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash Equivalents Short-Term Investments Long-Term Investments Cash equivalents: Money Market funds $ 855,000 $ — $ — $ 855,000 $ 855,000 $ — $ — Subtotal 855,000 — — 855,000 855,000 — — Investments: Corporate Notes/Bonds 2,919,000 — ( 15,000 ) 2,904,000 — 135,000 2,769,000 Convertible Debt 250,000 — — 250,000 — — 250,000 Subtotal 3,169,000 — ( 15,000 ) 3,154,000 — 135,000 3,019,000 Total $ 4,024,000 $ — $ ( 15,000 ) $ 4,009,000 $ 855,000 $ 135,000 $ 3,019,000 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash Equivalents Short-Term Investments Long-Term Investments Cash equivalents: Money Market funds $ 9,424,000 $ — $ — $ 9,424,000 $ 9,424,000 $ — $ — Subtotal 9,424,000 — — 9,424,000 9,424,000 — — Investments: Commercial Paper 700,000 — — 700,000 — 700,000 — Corporate Notes/Bonds 7,658,000 7,000 ( 1,000 ) 7,664,000 — 2,059,000 5,605,000 Convertible Debt 605,000 — — 605,000 — — 605,000 Subtotal 8,963,000 7,000 ( 1,000 ) 8,969,000 — 2,759,000 6,210,000 Total $ 18,387,000 $ 7,000 $ ( 1,000 ) $ 18,393,000 $ 9,424,000 $ 2,759,000 $ 6,210,000 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 Value Due within one year $ 135,000 $ 135,000 Due after one year through five years 3,034,000 3,019,000 $ 3,169,000 $ 3,154,000 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 53 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 Inventories consist of: December 31 2021 2020 Finished goods $ 91,000 $ 23,000 Raw and processed materials 104,000 113,000 $ 195,000 $ 136,000 NOTE 8 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and the estimated useful lives are as follows: Estimated December 31 useful life 2021 2020 Buildings and improvements 3 - 40 years 22,000 22,000 Machinery and equipment 3 - 15 years 3,940,000 3,946,000 Furniture and fixtures 3 - 10 years 508,000 280,000 Construction in progress — 27,000 4,470,000 4,275,000 Less accumulated depreciation ( 4,329,000 ) ( 3,970,000 ) $ 141,000 $ 305,000 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: Ecessa JDL Total January 1, 2020 $ — $ — $ — Acquisition 1,341,000 745,000 2,086,000 December 31, 2020 $ 1,341,000 $ 745,000 $ 2,086,000 December 31, 2021 $ 1,341,000 $ 745,000 $ 2,086,000 Gross goodwill 1,341,000 745,000 2,086,000 Accumulated impairment loss — — — Balance at December 31, 2021 $ 1,341,000 $ 745,000 $ 2,086,000 54 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 Net Trade Name/Trademark/Internet Domain Assets $ 101,000 $ ( 15,000 ) $ 86,000 Non-compete Agreements 80,000 ( 42,000 ) 38,000 Customer Relationships 1,010,000 ( 197,000 ) 813,000 Internally Developed Software 1,800,000 ( 407,000 ) 1,393,000 $ 2,991,000 $ ( 661,000 ) $ 2,330,000 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Trade Name/Trademark/Internet Domain Assets $ 90,000 $ ( 5,000 ) $ 85,000 Non-compete Agreements 80,000 ( 16,000 ) 64,000 Customer Relationships 1,010,000 ( 34,000 ) 976,000 Internally Developed Software 1,800,000 ( 150,000 ) 1,650,000 $ 2,980,000 $ ( 205,000 ) $ 2,775,000 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: 2022 $ 442,000 2023 426,000 2024 415,000 2025 381,000 2026 357,000 Thereafter 309,000 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 October 29, 2020, the Company entered into a First Amendment to the Credit Agreement. 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 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. 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. 55 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: 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. , No. 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. , No. 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. 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. 56 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, 2021. Weighted average Weighted average exercise price remaining Options per share contractual term Outstanding – December 31, 2019 1,130,472 $ 7.28 3.48 years Awarded 191,301 5.10 Exercised ( 8,000 ) 2.64 Forfeited ( 140,583 ) 10.90 Outstanding – December 31, 2020 1,173,190 6.52 3.35 years Awarded — — Exercised ( 799,390 ) 4.70 Forfeited ( 373,800 ) 10.43 Outstanding – December 31, 2021 — — 0 years Exercisable at December 31, 2021 — $ — 0 years Expected to vest December 31, 2021 — $ — 0 years 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 2020 Expected volatility 31.3 % Risk free interest rate 2.2 % Expected holding period 6 years Dividend yield 3.0 % 57 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 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. 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, 2019 to December 31, 2021: Weighted Average Grant Date Shares Fair Value Outstanding – December 31, 2019 321,227 $ 3.37 Granted 95,631 5.33 Vested ( 57,952 ) 2.81 Forfeited ( 86,211 ) 4.22 Outstanding – December 31, 2020 272,695 3.37 Granted — — Vested ( 194,586 ) 4.05 Forfeited ( 78,109 ) 3.56 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 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. 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, 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. 58 NOTE 13 - INCOME TAXES Income tax (benefit) expense from continuing operations consists of the following: Year Ended December 31 2021 2020 Current year income taxes (benefit): Federal $ 6,000 $ ( 9,000 ) State 19,000 14,000 25,000 5,000 Deferred income taxes: Federal $ — $ 10,000 — 10,000 Income tax expense (benefit) $ 25,000 $ 15,000 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 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. rather than U.S. income taxes. Net2Edge, Ltd. 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 2021 2020 Tax at U.S. statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit ( 0.3 ) ( 0.4 ) Foreign income taxes, net of foreign tax credits — — Other nondeductible items 3.8 ( 1.0 ) Change in valuation allowance ( 22.2 ) ( 22.5 ) Other ( 2.6 ) 2.6 Effective tax rate ( 0.3 )% ( 0.3 )% 59 Deferred tax assets and liabilities as of December 31 related to the following: 2021 2020 Deferred tax assets: Allowance for doubtful accounts $ 12,000 $ 26,000 Inventory 21,000 798,000 Accrued and prepaid expenses 139,000 313,000 Lease liability 43,000 70,000 Domestic net operating loss carry-forward 2,684,000 2,959,000 Capital loss carry-forward — 439,000 Nonemployee director stock compensation 616,000 552,000 Other stock compensation — 82,000 Foreign net operating loss carry-forwards and credits 1,418,000 3,261,000 Federal and state credits 367,000 767,000 Other 386,000 19,000 Gross deferred tax assets 5,686,000 9,286,000 Valuation allowance ( 5,210,000 ) ( 8,728,000 ) Net deferred tax assets 476,000 558,000 Deferred tax liabilities Depreciation ( 303,000 ) ( 318,000 ) Intangible assets ( 136,000 ) ( 175,000 ) Lease right-of-use asset ( 37,000 ) ( 65,000 ) Net deferred tax liability ( 476,000 ) ( 558,000 ) 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, 2021. This objective evidence limits the ability to consider other subjective evidence such as the projections for future growth. 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, 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. 60 Changes in the Company’s uncertain tax positions are summarized as follows: 2021 2020 Uncertain tax positions – January 1 $ 115,000 $ 101,000 Gross increases - current period tax positions ( 2,000 ) 14,000 Uncertain tax positions – December 31, 2021 $ 113,000 $ 115,000 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 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. and primarily makes sales in the U.S. Consolidated sales to U.S. 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: Services & Intersegment Support Other Eliminations Total 2021 Sales $ 7,483,000 $ — $ ( 473,000 ) $ 7,010,000 Cost of sales 4,576,000 — — 4,576,000 Gross profit 2,907,000 — ( 473,000 ) 2,434,000 Selling, general and administrative expenses 2,906,000 4,722,000 ( 500,000 ) 7,128,000 Amortization expense 457,000 — — 457,000 Transaction costs — 2,347,000 — 2,347,000 Impairment loss — 206,000 — 206,000 Restructuring expense — 468,000 — 468,000 Operating (loss) income ( 456,000 ) ( 7,743,000 ) 27,000 ( 8,172,000 ) Other income 12,000 6,000 — 18,000 (Loss) income from continuing operations before tax $ ( 444,000 ) $ ( 7,737,000 ) $ 27,000 $ ( 8,154,000 ) Depreciation and amortization $ 556,000 $ 266,000 $ — $ 822,000 Capital expenditures $ 11,000 $ 24,000 $ — $ 35,000 Assets $ 6,247,000 $ 13,827,000 $ — $ 20,074,000 61 Services & Intersegment Support Other Eliminations Total 2020 Sales $ 8,777,000 $ — $ ( 697,000 ) $ 8,080,000 Cost of sales 5,798,000 — ( 35,000 ) 5,763,000 Gross profit 2,979,000 — ( 662,000 ) 2,317,000 Selling, general and administrative expenses 2,464,000 5,250,000 ( 662,000 ) 7,052,000 Amortization expense 205,000 — — 205,000 Transaction costs — 685,000 — 685,000 Operating income (loss) 310,000 ( 5,935,000 ) — ( 5,625,000 ) Other (expense) income ( 32,000 ) 964,000 — 932,000 Income (loss) from continuing operations before tax $ 278,000 $ ( 4,971,000 ) $ — $ ( 4,693,000 ) Depreciation and amortization $ 292,000 $ 516,000 $ — $ 808,000 Capital expenditures $ 14,000 $ 155,000 $ — $ 169,000 Assets $ 8,521,000 $ 47,062,000 $ ( 27,000 ) $ 55,556,000 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 Level 1 Level 2 Level 3 Total Fair Value Cash equivalents: Money Market funds $ 855,000 $ — $ — $ 855,000 Subtotal 855,000 — — 855,000 Short-term investments: Corporate Notes/Bonds — 135,000 — 135,000 Subtotal — 135,000 — 135,000 Long-term investments: Corporate Notes/Bonds — 2,769,000 — 2,769,000 Convertible Debt — — 250,000 250,000 Subtotal — 2,769,000 250,000 3,019,000 Total $ 855,000 $ 2,904,000 $ 250,000 $ 4,009,000 62 December 31, 2020 Level 1 Level 2 Level 3 Total Fair Value Cash equivalents: Money Market funds $ 9,424,000 $ — $ — $ 9,424,000 Subtotal 9,424,000 — — 9,424,000 Short-term investments: Commercial Paper — 700,000 — 700,000 Corporate Notes/Bonds — 2,059,000 — 2,059,000 Subtotal — 2,759,000 — 2,759,000 Long-term investments: Corporate Notes/Bonds — 5,605,000 — 5,605,000 Convertible Debt — — 605,000 605,000 Subtotal — 5,605,000 605,000 6,210,000 Current Liabilities: Accrued Consideration — — ( 550,000 ) ( 550,000 ) Subtotal — — ( 550,000 ) ( 550,000 ) Total $ 9,424,000 $ 8,364,000 $ 55,000 $ 17,843,000 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 – 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. ‎ 63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.