1、TableofContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934For the Fiscal Year Ended September 30,2019.TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1
2、934For the transition period from toCommission File Number 000 10843CSP Inc.(Exact name of Registrant as specified in its Charter)Massachusetts04 2441294(State of incorporation)(I.R.S.Employer Identification No.)175 Cabot Street,Lowell,Massachusetts 01854(Address of principal executive offices)(978)
3、954 5038(Registrants telephone number including area code)Securities Registered Pursuant to Section 12(b)of the Act:Title of Each Class Trading Symbol(s)Name of each exchange on which registeredCommonStock,parvalue$0.01pershareCSPINasdaqGlobalMarketSecurities registered pursuant to Section 12(g)of t
4、he Act:NoneIndicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesNoIndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesNoIndicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledb
5、ySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesNo.IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyeveryInteractiveDataFil
6、erequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitsuchfiles).YesNo.IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-K(229.405ofthischapter)isnotconta
7、inedherein,andwillnotbecontained,tothebestofregistrantsknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10KoranyamendmenttothisForm10K.Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,asmallerreporting
8、company,oranemerginggrowthcompany.Seethedefinitionsof“largeacceleratedfiler”,“acceleratedfiler”,“smallerreportingcompany”,andemerginggrowthcompanyinRule12b2oftheExchangeAct.LargeacceleratedfilerAcceleratedfilerNon-acceleratedfilerSmallerReportingCompanyEmergingGrowthCompanyIfanemerginggrowthcompany,
9、indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b2oftheExchangeAct).YesNoTheaggregatemarket
10、valueoftheregistrantscommonstockheldbynon-affiliatesoftheregistrantwas$40,671,108basedontheclosingsalepriceof$11.15asreportedontheNasdaqGlobalMarketonMarch29,2019.AsofDecember3,2019,wehadoutstanding4,153,742sharesofcommonstock.DOCUMENTS INCORPORATED BY REFERENCECertainportionsoftheinformationrequire
11、dinPartIIIofthisForm10Kareincorporatedbyreferencefromourdefinitiveproxystatementforour2020annualmeetingofstockholderstobefiledwiththeSecuritiesandExchangeCommissionwithin120daysaftertheendofourfiscalyearendedSeptember30,2019.TableofContentsTABLE OF CONTENTSPagePARTI.Item1.Business2Item1A.RiskFactors
12、11Item2.Properties19Item3.LegalProceedings19Item4.MineSafetyDisclosures19PARTII.Item5.MarketforRegistrantsCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities20Item7.ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations20Item8.FinancialStatementsandSuppleme
13、ntaryData31Item9.ChangeinandDisagreementswithAccountantsonAccountingandFinancialDisclosures32Item9A.ControlsandProcedures32Item9B.OtherInformation33PARTIII.Item10.Directors,ExecutiveOfficersandCorporateGovernance33Item11.ExecutiveCompensation33Item12.SecurityOwnershipofCertainBeneficialOwnersandMana
14、gementandRelatedStockholderMatters33Item13.CertainRelationshipsandRelatedTransactionsandDirectorIndependence34Item14.PrincipalAccountantFeesandServices34PARTIV.Item15.ExhibitsandFinancialStatementSchedules34Item16.Form10KSummary36Note:Items1B,6and7AarenotrequiredforSmallerReportingCompaniesandtheref
15、orearenotfurnished.iTableofContentsSpecial Note Regarding Forward-Looking StatementsThis annual report on Form 10K contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933,as amended,and Section 21E of the Securities Exchange Act of 1934,as amended.This info
16、rmation mayinvolve known and unknown risks,uncertainties and other factors that are difficult to predict and may cause our actual results,performance or achievements to be materially different from future results,performance or achievements expressed or implied byany forward-looking statements.The d
17、iscussion below contains certain forward-looking statements related but not limited to,among others,statements concerning future revenues and future business plans.Forward-looking statements include statementsin which we use words such as“expect,”“believe,”“anticipate,”“intend,”“estimate,”“should,”“
18、could,”“may,”“plan,”“potential,”“predict,”“project,”“will,”“would”and similar expressions.Although we believe the expectations reflected insuch forward-looking statements are based on reasonable assumptions,the forward-looking statements are subject to significantrisks and uncertainties,and thus we
19、cannot assure you that these expectations will prove to be correct,and actual results mayvary from those contained in such forward-looking statements.We discuss many of these risks and uncertainties in Item 1A underthe heading“Risk Factors”in this Annual Report.Factors that may cause such variances
20、include,but are not limited to,our dependence on a small number of customersfor a significant portion of our revenue,our high dependence on contracts with the U.S.federal government,our reliance incertain circumstances on single sources for supply of key product components,and intense competition in
21、 the market segments inwhich we operate.Given these uncertainties,you should not place undue reliance on these forward-looking statements.Also,forward-looking statements represent our estimates and assumptions only as of the date of this document.We have based theforward-looking statements included
22、in this annual report on Form 10K on information available to us on the date of this annualreport,and we assume no obligation to update any such forward-looking statements,other than as required by law.1TableofContentsPART IItem 1.BusinessCSPInc.(CSPiorCSPIortheCompanyorweorour)wasincorporatedin1968
23、andisbasedinLowell,Massachusetts.Tomeetthediverserequirementsofourcommercialanddefensecustomersworldwide,CSPianditssubsidiariesdevelopandmarketITintegrationsolutions,advancedsecurityproducts,managedITservices,cloudservices,purposebuiltnetworkadapters,andhigh-performanceclustercomputersystems.OnJuly3
24、1,2018,CSPiLTDsoldalloftheoutstandingstockofModcompGmbHfor$14.4millioncash,andrecognizedagainof$16.8million.ThedivestitureofourGermanoperationsandourincreasedcashpositionenablesustofocustimeandresourcesonourhigher-marginandgreater-potentialgrowthopportunities.Weareencouragedbythetractionofourmanaged
25、servicesbusinessintheU.S.andweintendtocontinuetoinvestandfocusonournewARIASDScybersecurityproductsandtocapitalizeontheproliferationofourwirelessservicebusiness.SegmentsCSPIoperatesintwosegments:TechnologySolutions(TS)andHighPerformanceProducts(HPP).TS SegmentTheTSsegmentconsistsofourwholly-ownedModc
26、ompsubsidiary,whichoperatesintheUnitedStatesandtheUnitedKingdom.TheTSsegmentgeneratesproductrevenuesbyresellingthird-partycomputerhardwareandsoftwareasavalueaddedreseller(VAR).TheTSsegmentgeneratesservicerevenuesbythedeliveryofintegrationservicesforcomplexITenvironments,includingadvancedsecurity;uni
27、fiedcommunicationsandcollaboration;wirelessandmobility;datacentersolutions;andnetworksolutionsaswellasmanagedITservices(MSP)thatprimarilyservethesmallandmid-sizedbusinessmarket(SMB).ThirdpartyproductsandprofessionalservicesaremarketedandsoldthroughtheCompanysdirectsalesforceintoavarietyofverticalmar
28、kets,including;automotive;defense;healthcare;education;federal,stateandlocalgovernment;andmaritime.CSPisoldalloftheoutstandingstockofModcompGmbHtoReplyAGonJuly31,2018fortotalcashconsiderationof$14.4million.CSPirecognizedaone-timegainof$16.8million.TheCompanydeterminedtheGermansubsidiarymetthecriteri
29、afordiscontinuedoperationsunderASC205.TheConsolidatedBalanceSheetsandConsolidatedStatementsofOperationsreflecttheresultsofModcompGmbHclassifiedasdiscontinuedoperationsatandasofSeptember30,2018.SeeNote2totheconsolidatedfinancialstatementsforadditionalinformation.HPP SegmentTheHPPsegmentrevenuecomesfr
30、omfourdistinctproductlines:(i)acybersecuritysolutionmarketedasARIASoftware-DefinedSecurity(“SDS”),whichisofferedtocommercial,originalequipmentmanufacturers(OEM)andgovernmentcustomers;(ii)theMyricom networkadaptersforcommercial,governmentandOEMcustomers;(iii)theARIAnVoySeriesofappliancesforManagedSec
31、urityServiceProviders(“MSSPs”)andend-usercustomers;and(iv)thelegacyMulticomputerproductportfoliofordigitalsignalprocessing(DSP)applicationswithinthedefensemarkets.TheARIASDSsolutionisasoftwareportfoliostartingwiththeunderlyingplatform(orchestrator,light-weightinstances),andhostedapplications,aswella
32、ssupportinghardware(turn-keysecurityappliances),alldevelopedtosecureanorganizationsnetwork,enterprise-wide,tobetterprotectcriticaldevices,applicationsandhigh-2TableofContentsvaluedata,suchaspersonallyidentifiableinformation(PII),frombreaches.Revenuewillcomefromthesaleoflicensesofoursoftwareplatformc
33、omponents,hostedapplications,turnkeyappliancesandtherequiredsupportpackages.Thesoftwarelicensesarerenewableonanannualbasis.TheARIASDSplatformandapplicationscanbedeployedonourseparatelysoldMyricomadaptersthatcanbedeployedwithinourcustomersservers,orviaourturn-keyappliancesthatcanbedeployedindatacente
34、rsorwithinthecustomersnetworktoprovidenetworksecurityservices.Alternatively,withfuturereleases,organizationswillbeabledeployARIASDSoncloudinfrastructureasaservicetoprotectthisportionoftheirITenvironment.Wehadourfirstsaleinthelasthalfoffiscalyear2019andthepipelinehasstartedtobuildupforfiscalyear2020.
35、Weexpecttohaveadditionalrevenuestartinginthesecondquarteroffiscalyear2020,whichweexpectwillincreasethroughouttheyear.WeanticipatethattheARIASDSportfoliowillbeofvaluetoregulatedindustries,suchasfinancialservicesorhealthcare,duetotheriseofdata-privacyregulationsenforcedatthefederal,U.S.state,andintern
36、ationallevel,aswellasindustryentities.Wealsobelievetheunique,patent-pendingapproachwillbeattractivetomanagedsecurityservicesproviders(MSSP)andOEMsthatpursuedifferentiatedsecurityservicesfortheircustomers.WhileourinitialofferingsoftheARIASDSportfolioareavailablenow,thenumberofofferingswillcontinuetoe
37、xpandovertime.TheMyricomnetworkadapters(ARCSeriesandSIA)areoptimizedforandsoldintomarketsthatrequirehighbandwidthandlowlatencyincluding(i)packetcapture,(ii)financialtransactions,and(iii)storageinterconnect.AndwithourSIAorganizationsthatrequireadvancedsecurityfeaturesaddedtotheirproductionserverdeplo
38、yments.Ourprimarycustomersforpacketcaptureincludegovernmentagenciesthatneedtocapture,inject,andanalyzenetworktrafficatlinerate,andOEMssellingintovendorsofcomputersecurityappliances.Financialinstitutions,suchasbanks,andbrokeragefirmsuseMyricomadapterstodecreasetransactiontimes.Ourstorageinterconnectc
39、ustomers,primarilyinthefilmindustry,useouradaptersforvideocaptureandfilmediting.Organizationsthatrunadvancednetworksecurityfeaturesbenefitfromtheabilitytorunsuchapplicationssafelyonouradapterpreservingserverperformanceforproductionapplications.ThenVoySeriesofappliances(PacketRecorderandPacketBroker)
40、canbedeployedaspartofanorganizationsdatasecuritystructureasanewcomponenttocomplementexistingsystemsandprovidesdatabreachverificationandnotificationaswellascompliancereporting.TheprimarycustomerswillbeOEMsorMSSPsthatarelookingtoexpandtheirproductandservicesofferingsofindustryregulationcomplianceandbr
41、eachresponsesolutions.MulticomputerproductsforDSPapplicationsarenolongerbeingactivelydevelopedbutwillcontinuetobesoldfordeploymentandsupportedforseveralyears.Revenueflowscomefromservicingpreviouslydeployedproductsforamodestnumberofexistinghigh-valuedefensecustomers.Therefore,therevenuefromtheseprodu
42、cts,asapercentageofoverallCompanyrevenue,isexpectedtodeclineovertime.Sales Information by Industry SegmentThefollowingtabledetailsoursalesbyoperatingsegmentforfiscalyearsendingSeptember30,2019and2018.AdditionalsegmentandgeographicalinformationissetforthinNote18totheconsolidatedfinancialstatements.Se
43、gment 2019%2018%(Dollar amounts in thousands)TS$71,159 90%$62,437 86%HPP 7,902 10%10,479 14%TotalSales$79,061 100%$72,916 100%3TableofContentsTS SegmentProducts and ServicesIntegration SolutionsIntheTSsegment,wefocusonvalue-addedreseller(VAR)integratedsolutionsincludingthird-partyhardware,softwarean
44、dtechnicalcomputer-relatedconsultingservicesandmanagedservices.Ourvaluepropositionisourabilitytointegratediversethird-partycomponentstogetherintoacompletesolutiontoinstallthesystematthecustomersiteandtoofferhighvalueITconsultingservicestodeliversolutions.Third-Party Hardware and SoftwareWesellthird-
45、partyhardwareandsoftwareproductsintheinformationtechnologymarket,withastrategicfocusonindustrystandardserversanddatacenterinfrastructuresolutions,midrangedatastorageinfrastructureproducts,networkproducts,unifiedcommunications,andITsecurityhardwareandsoftwaresolutions.Ourkeyofferingsincludeproductsfr
46、omHPE/Aruba,CiscoSystems,PaloAltoNetworks,DellEMC,JuniperNetworks,Citrix,Intel,VMWare,Fortinet,MicrosoftandCheckpoint.Throughourbusinessrelationshipswiththesevendors,weareabletooffercompetitivelypricedrobustproductstomeetourcustomersdiversetechnologyneeds,providingprocurementandengineeringexpertisei
47、nserverinfrastructure,storage,security,unifiedcommunicationsandnetworking,tothesmall-to-mediumsizedbusinesses(SMBs)andlargeenterprisebusinesses(LEBs)withcomplexITenvironments.Weofferourcustomersasinglepointofcontactforcomplexmulti-vendortechnologypurchases.ManyofourSMBcustomershaveuniquetechnologyne
48、edsandmaylacktechnicalpurchasingexpertiseorhaveverylimitedITengineeringresourcesonstaff.Wealsoprovideinstallation,integration,logisticalassistanceandothervalue-addedservicesthatcustomersmayrequire.Ourcurrentcustomersareinwebandinfrastructurehosting,education,telecommunications,healthcareservices,dis
49、tribution,financialservices,professionalservicesandmanufacturing.WetargetSMBsandLEBcustomersacrossallindustries.Professional ServicesWeprovideprofessionalITconsultingservicesinthefollowingareas:Implementation,integration,migration,configuration,installationservicesandprojectmanagement.Hyper-Converge
50、dInfrastructure(HCI)-WeassistourclientswithdesigningandimplementingHCIsolutionsfrommultiplevendorsincludingDellEMC,Nutanix,HPEandCisco.HCIisasoftware-centricarchitecturethattightlyintegratescompute,storageandvirtualizationresourcesinasinglesystem.ThebenefitsofanHCIsolutionareimprovedperformance,scal
51、abilityandflexibilityallinareducedfootprint.Virtualization-WehelpourcustomersimplementvirtualizationsolutionsusingproductsfromcompaniessuchasVMWareandCitrixthatallowonecomputertodothejobofmultiplecomputersbysharingresourcesofasinglecomputeracrossmultipleenvironments.Virtualizationeliminatesphysicala
52、ndgeographicallimitationsandenablesuserstohostmultipleoperatingsystemsandapplicationsonfewerservers.Benefitsincludeenergycostsavings,lowercapitalexpenditurerequirements,highavailabilityofresources,betterdesktopmanagement,increasedsecurityandimproveddisasterrecovery.Enterprisesecurityintrusionprevent
53、ion,networkaccesscontrolandunifiedthreatmanagement.Usingthird-partyproductsfromcompanieslikePaloAlto,ArubaNetworks,JuniperNetworks,Fortinet,CheckpointandCiscoSystems,ourservicesaredesignedtoensuredatasecurityandintegritythroughtheestablishmentofvirtualprivatenetworks,firewallsandothertechnologies.IT
54、securitycomplianceservices.WeprovideservicesforITsecuritycompliancewithpersonalprivacylawssuchasthePaymentCardIndustryDataSecurityStandard(PCIDSS),theHealthInsurancePortabilityand4TableofContentsAccountabilityActof1996(HIPAA),andinternalcontrolregulationsundertheSarbanes-OxleyAct(SOX).Unifiedcommuni
55、cations,wirelessandroutingandswitchingsolutionsusingCiscoSystemsandArubaNetworksproductsandservices.Customsoftwareapplicationsandsolutionsdevelopmentandsupport.WedevelopcustomapplicationstocustomerspecificationsusingindustrystandardplatformssuchasMicrosoft.Net,SharePointandOnBase.WeareaMicrosoftGold
56、Partner.ManagedITservicesthatincludemonitoring,reportingandmanagementofalertsfortheresolutionandpreventivegeneralITandITsecuritysupporttasks.Maintenanceandtechnicalsupportforthird-partyproductsincludinghardwareandsoftware,operatingsystemandusersupport.Managed and Cloud ServicesAsconsumptionmodelscon
57、tinuetoevolveinourindustry,wehavedevelopedarobustmanaged&cloudservicesofferingtoprovidealternativesolutionstotraditionalcapitalexpenditureinvestmentsinITsolutionsandIToperationsforourclients.Ourvalueistoprovideanelasticofferingthatwillallowtheclienttoscaleandconsumetheseofferingswithmonthlybillingop
58、tionsthathelpcontrolcostsandprovideeconomiesofscale.Weprovidemanagedandcloudservicesinthefollowingareas:ProactivemonitoringandremotemanagementofITInfrastructurethatincludesnetwork(bothwiredandwireless),datacenter(whichincludescompute,storageandvirtualization),desktops,unifiedcommunicationsplatformsa
59、ndsecurity.ManagedandHostedUnifiedCommunicationasaServiceviaaCiscoCollaborationofferingunderanannuityprogram.ManagedSecurity(firewall,endpointprotection,malware,anti-virusandSIEM).ManagedBackUpandReplication.CloudservicesthatincludeMicrosoftOffice365,Azure,GreencloudandAmazonWebServices.Markets,Mark
60、eting and Dependence on Certain CustomersWeareanITsystemsintegratorandcomputerhardwareandsoftwareVAR.Wealsoprovidetechnicalservicestoachieveavalue-addtoourcustomers.WeoperatewithintheVARsaleschannelsofmajorcomputerhardwareandsoftwareOEMs,primarilywithinthegeographicareasofoursalesofficesandacrossthe
61、U.S.WeprovideinnovativeITsolutions,includingamyriadofinfrastructureproductswithcustomizedintegrationconsultingservicesandmanagedservicestomeettheuniquerequirementsofourcustomers.WemarkettheproductsandserviceswesellthroughsalesofficesintheU.S.andtheU.K.usingourdirectsalesforce.CompetitionOurprimaryco
62、mpetitionintheTSsegmentisotherVARsrangingfromsmallcompaniesthatnumberinthethousands,tolargeenterprisessuchasCDW,PCConnection,Insight,Presidio,DimensionData,andComputacenterLimited.Inaddition,wecompetedirectlywithmanyofthecompaniesthatmanufacturethethird-partyproductswesell,includingCiscoSystems,IBM,
63、HewlettPackard(HPE),EMC(nowpartofDell)andothers.Inthenetwork5TableofContentsmanagement,securityandstoragesystemsintegrationservicesbusiness,ourcompetitorsareextensiveandvarytoacertaindegreeineachofthegeographicalmarkets,buttheyalsoincludesuchnationalcompetitorsasHP/EDS,IBMandCapGemini.Nearlyallofour
64、productofferingsareavailablethroughotherchannels.FavorablecompetitivefactorsfortheTSsegmentincludeprocurementcapability,productdiversitywhichenablesthedeliveryofcompleteandcustomsolutionstoourcustomersandthestrengthofourkeybusinessrelationshipswiththemajorITOEMs.Wealsoconsiderourabilitytomeettheuniq
65、ueand/orspecializedneedsoftheSMBandLEBmarketsandourstrongknowledgeoftheITproductsthatweselltobeakeycompetitiveadvantage.OurabilitytoprovidemanagedservicesthroughournetworkoperationscenterandtheprofessionalITservicesrequiredtodesignandinstallcustomITsolutionstoaddressourcustomersITneedsaredistinctcom
66、petitiveadvantages.Unfavorablecompetitivefactorsincludelownamerecognition,limitedgeographiccoverageandpricing.BacklogThebacklogofcustomerordersandcontractsfortheTSsegmentwasapproximately$4.0millionatSeptember30,2019,ascomparedto$7.2millionatSeptember30,2018.Ourbacklogcanfluctuategreatly.Thesefluctua
67、tionscanbeduetothetimingofreceivinglargeordersforthird-partyproductsand/orITservices.Itisexpectedthatallofthecustomerordersinbacklogwillshipand/orbeprovidedduringfiscalyear2020.HPP SegmentProducts and ServicesThemissionoftheHPPteamistodeliveradifferentiated,smarterapproachtocybersecurity.Oursoftware
68、-definedplatformmakesiteasierfororganizationstoachieveenterprise-widenetworksecurityandprotectionofcriticalassets,applicationsanddevicesbyimprovingtheirnetworkvisibilitycapabilitiesandacceleratingtheirincidentresponse.ProductsTheARIASDSsolutionwillgiveorganizationsanautomated,central,andcoordinatedw
69、aytoacceleratecyberthreatdetectionandresponse,implementandenforcesecuritypolices,controlwhichapplicationscanaccesscriticalassets,andtoprotectapplicationsandtheassociateddata.TheARIAOrchestrator(SDSo)andinstances(SDSi),providethefoundationoftheARIAplatform,sothataseriesoflightweightadvancedsecurityap
70、plicationscanbedeployed,provisionedandmanageduniformlyacrossanysizedorganization.Theseinstancescanbedeployedinavarietyofscenariosincludingbaremetalservers,virtualmachines(VMs),andcontainer-basedcomputeenvironments.TheARIASDSowillautomaticallydetectanyinstancesandwillprogrammaticallyexecutethespecifi
71、edapplicationssecurityfeaturesetstrengtheninganorganizationssecurityposture.Forcustomersthatdesireaturnkeysolution,abundledofferingcanbecreatedfordeploymentandopensthepossibilityforprofessionalservicesandintegrationservicesofferingstoourchannel.ARIA SDS APPLICATIONSThedeploymentofhostedapplicationsb
72、ringlifetotheARIASDSplatform.Applicationavailabilitywillexpandovertimeasnewproductsarereleased.However,thecurrentofferingswebelievehavesignificantmarketpotential.1)ARIA SDS Packet Intelligence:TheARIAPacketIntelligence(PI)applicationdirectsallofanorganizationsnetworktraffictoexistingintrusiondetecti
73、onsystems(“IDS”)securitytoolssuchassecurityinformationandeventmanagementsolutions(SIEMs),userandentitybehavioranalytics(UEBA),ornetworkintrusionprotectionsystems(NIPS”or“IPS),andmakingthesetoolsmoreeffectiveatdetectingnetwork-bornthreats.6TableofContentsTheARIAPIapplicationwillbeavailableaslicensedf
74、unctionalitywithinalow-costhigh-availability(HA)securityappliance,orprobe,thattapsintoanorganizationsnetworkinfrastructure,aswellasontheMyricomSecureIntelligentAdapter(SIA).Theprobewillbeabletominedataat10-25Glineratesandperformremedialactionstostopthreatsonaper-trafficstreambasiswhileminimizingimpa
75、ctonnetworktrafficperformance.Built-inAPIsallowcompatible3 partythreatdetectiontoolstotakeactionstostopdetectedthreats.Itisourbeliefthatcompetingsolutionscurrentlydonotprovidethismixandlevelofcapability.Wewillbeabletoprovideapackagedsolutionbyinstalling3 partyIPS/IDSapplications,ontoARIAhardwareappl
76、iancesthatrunalongsideandarefedbyARIASDSapplications,suchasPacketIntelligence.TheARIAPIapplicationwillbeabletoimproveIPSorIDSperformancebypreprocessingthedatafeeds,allowingsuchsolutionstoruneffectivelyathigherlinerates.2)ARIA SDS Packet Capture:OurSniffer10G(SNF)softwareisusedbyintelligenceagenciesf
77、orpacketcapture,networksurveillanceapplications,andtoperformdetailedcyber-threatanalysis.ItsarecommendedsolutiontoincreasetheZeekIDS(formerlyknownasBro)tosupport10Glineratesratherthanthestandard1G.WiththeintroductionofARIASDSandtheMyricomSIA,SNFwillbeupgradedtosupporta25Gline-rate.Whenusedinconjunct
78、ionwiththePacketIntelligenceapplication,theSNFapplicationcanprovidethedetailsrequiredtodeterminetheexacttypeofthreatand/oridentifythecompromiseddatarecords.3)ARIA SDS KMS(Key Management Server):TheARIAKMSapplicationwillmakeiteasiertoaddencryptionanddecryptioncapabilitiestoapplicationswhichleverageas
79、tandards-basedkeymanagementinteroperabilityprotocol(KMIP)client.Forexample,eachofVMwaresvSphereandvSANinstancesleverageaKMIPclienttoencrypttheirapplicationdataoutput.Assuch,theyneedtobefedKMIPcompatiblekeystoperformencryption.Dependinguponthesizeoftheenvironment,thiscouldrequirehundredsofkeysperminu
80、te.OurKMSkeymanagementserversolutionprovidessuchKMIPkeyssecurelyandrapidlyatscalewhileensuringthatthekeyserversarehighlyavailableatalltimes.Ourapplicationwasdesignedtosolvethedeploymentcomplexitychallengescurrentlyassociatedwithkeymanagement.4)ARIA AIR(Automated Investigative Response)TheARIAAIRandP
81、acketRecorderapplicationswillmakeiteasiertodetectdatabreachesandexfiltrateddatafromcriticaldataapplications.Usedinconjunctionwiththreatintelligencetoolswhichwillalertifaninternalsystemisaccessingabadsite,weingestthealertuseittotriggerasearchourrecordingsofthetrafficflowingfromthecriticalapplications
82、todetermineifthereisamatch.Thisindicatesabreachandprovidesarecordofalltherecordsthathavebeenexfiltrated.MYRICOM NETWORK ADAPTERSMyricom ARC Series product lineincludesaportfolioofEthernetadaptersandspecializedsoftware,whichisbrandedasDBLforfinancialinstitutionsandSniffer10G(SNF)fornetworkmonitoring.
83、BotharecompatiblewithLinux,Windows,MacOSX,andVMwareESX.Ouradaptersactasstand-aloneNetworkInterfaceCards(NIC”)andsupportpurpose-builtforapplicationsthatprovidehighbandwidth,lowlatencyandline-ratepacketcapture,andprocessingoffloadforhigh-frequencyfinancialtradingandnetworktrafficanalysisapplications.M
84、yricom Secure Intelligent Adapter(SIA)isournext-generationadapterandwillprovideadditionalcomputecapabilitiesandspecializedhardwaretoruntheARIASDSplatformandapplications.A25GversionofSNFisbeingdevelopedtodeliverhigherlineratesasrequiredbyenterpriseandgovernmentcustomers.Thiswillalsolettheseorganizati
85、onsachievelosslesspacketcaptureandpacketinspection,whichisrequiredfornetworksurveillanceusecasesandtools,suchaslawfulintercept,deeppacketinspection,forensictools,andthreatdetectionapplications.OthercustomersfortheSIAincludeOEMsandMSSPpartnerstoruntheirownapplicationsupon.ARIA SECURITY APPLIANCESARIA
86、 Security Appliances providesastandalonesolutionthatcanbeeitherdeployedinlinetoprovidenetworksecurityorwithinadatacentertoprovidesecurityservices.TheseappliancesarebuiltwithoneormultiplebuiltinSIAadapters.Thisallowsforbroaderoptionstodeployourservicesinaturnkeyfashion.7rdrdTableofContentsnVoy Series
87、 iscomprisedofa100GPacketBrokeranda10GPacketRecorderapplianceoptimizedtorunourARIAsoftware.ThesetoolsassistcustomersinthedeploymentofourARIAsolutionintohigherspeednetworks,aswellasprovidethecomputeandstorageintensivefunctionsneedstoprovidesomeofourservicessuchasPacketrecording.MULTICOMPUTER PRODUCTS
88、Multicomputer products portfolioincludesthe2000SERIESVMEand3000SERIESVXSsystems.The2000SERIESproducts,basedonPowerPCRISCprocessorswithAltiVectechnology,high-speedmemory,andMyrinet-2000clusterinterconnect,arecurrentlyisusebycustomersintheaerospace,commercial,anddefensemarkets.The3000SERIESVXSproductl
89、ine,incorporatingtheFreescaleQorIQPowerPCprocessorswithAltiVectechnology,targetshigh-performanceDSP,signalintelligence(SIGINT),andradarandsonarapplicationsinairborne,shipboard,andunmannedaerialvehicle(UAV)platformswherespace,power,andcoolingareatapremium.TheHPPsegmentwillcontinuetoshipandrepairexist
90、ingMulticomputerproductstoitscustomerbaseandsupportaninstalledbaseofDSPsystems.Royalties on Multicomputer productsWelicensethedesignofcertain2000SERIEScomputerprocessorboardsandswitchinterconnecttechnologytothirdparties.Inexchangeforlicensingthistechnology,wereceivearoyaltypaymentforeachprocessorboa
91、rdthatutilizesourdesignfortheseproducts.Markets,Marketing and Dependence on Certain CustomersAerospace&Defense MarketOurfocusforfiscal2020andbeyondistocontinueoursupportofestablishedMulticomputerandMyricomproductsallowingsystemdeploymentstobemadebygovernmententities.Theseprogramshavesupportrequireme
92、ntsthatoftenextendbeyondtwentyyears.Financial Transactions MarketMyricomnetworkadapterswithDBLapplicationsoftwareaddresstheneedfortheultra-lowlatencyrequiredintheworldoffinancialtrading.RunningDBLontheMyricomARCSeriesprovidesaccelerationfor10GEthernetenvironments,withbenchmarkedapplication-to-applic
93、ationlatencyinthesingledigitmicrosecondrangeforLinuxandMicrosoftWindowsoperatingsystems.Packet Capture MarketMyricomSniffer10G,andindevelopment,the25Gsoftware,runningonMyricomEthernetadapters,providesenterpriseandgovernmentcustomersandpartnerstheabilitytocapture,inject,andanalyzenetworktrafficatline
94、rateforallEthernetpacketsizes,withlow-costCPUoverhead.Sniffer10Gservesthefollowingmarketsegments:networksurveillance,monitoringandanalysis,testing,measurement,andpacketgeneration,aswellasatechnologycomponentwithinintrusiondetectionsystems(IDS),forensictools,andthreatdetectionandresponsesolutions.Sto
95、rage Interconnect MarketMyricomARCSeriesnetworkadaptersareusedinawiderangeofnetworkedapplications,includingthosethatconnecttostoragesubsystemsusingEthernet.Manyofthesecustomersareusingcontent-creationapplicationsrequiringhigh-performancenetworkingfromthestoragesystemtovideo-editingworkstations.8Tabl
96、eofContentsCyber Security Products MarketTheARIASDSsolutionistargetedatorganizationsthatneedtogetadditionalfunctionalityoutoftheircurrentcybersecuritysolutionstofindandstopintrusionthreats,whilealsoreducingtheiroperatingcosts.WhileourARIASDSsolutionswillbeofferedthroughourdirectsaleschannel,itismore
97、likelythatsaleswillcomethroughviaindependentsoftwarevendorchannelstotheendcustomers.ThesevalueaddedresellerswillfindARIAappealingtoexpandtheirportfolioofsecurityproductsandservicesandreplaceless-effectivetoolsandprocessesintheircustomerenvironments.OEMsinthecybersecuritysegmentswillbecandidatesforAR
98、IASDSdeployments.ThesevendorscanbenefitfromintegratingtheARIAapplicationsasinternalsolutiontoolsetstoallowtheirapplicationtoscale,addcriticalfunctionality,orsolveparticularproblems,suchaspoorperformance.OEMsareinterestedintheMyricomAdaptersincludingourSIArunningourARIASDSapplications,foruseasSmartNI
99、Cswithintheirappliances.Webelievethiswillbealargegrowingmarketwecanparticipateininthecomingyears.AnothertargetfortheARIAsolutionwillbethemanagedsecurityservicesproviders,astheseprovidersdesiresimple,yetdifferentiated,solutionsthatcanbedeployedacrosstheircustomerbases.Theorchestrationandautomationcap
100、abilitiesfoundinARIASDSarevaluableastheyallowthesesecurityserviceproviderstoscaletheirofferingswhileincreasingtheproductivityoftheirsecurityoperationcenterstaff.CompetitionCSPiscompetitioninthecybersecurityspacecomesprimarilyfromthelarge,traditionalsecurityvendorslikeDell,IBM,andIntel.DuetotheARIAsa
101、pproachtonetworkanddatasecurity,wealsofacecompetitionfromtraditionalsecuritytoolsandcurrentapproachestofindingnetworkbasedattacks.ThecompetitionincludescommonfirewallmanufacturerswithbroadportfoliossuchasPaloAltoorCisco,andinthecaseofdatapacketbrokers,GigamonandIxia.CompetitorsforARIASDSencryptionin
102、cludeapplicationsandappliancesprovidedbyThales,HPEsVoltaicgroup,andothersmallermarketplayers.Inthecrowdedsecurityproductsmarket,ourhistoryofsupportingdefenseandgovernmentmilitaryprograms,strongsecurityapplicationexpertise,andtheabilitytodevelopoptimizedproductsforOEMswillhelpsetusapart.However,wemus
103、tcontinuallydevelopnewfeaturesandsolutionstostayabreastofevolvingcustomerrequirementsandleverageadvancesintechnology.OneexampleisIntelschip-levelroadmapthatmayprovideadditionalfunctionalityforourARIASDSsolutionbutourcompetitorscouldalsoattempttoleveragethis.Someofthesecompetitorsmayalsobepotentialgo
104、-to-marketpartnersorOEMcustomerslookingtointegrateourcapabilitieswithintheirproductsandsolutions.CustomerswhoneedacombinationofadvanceddataprotectionfeaturesandwhorequireoptimizedapplicationperformancearebestsuitedtotheARIAsolution.SecurityadapterproductswillalsoleveragepreviousgenerationMyricomARCS
105、eriesnetworkadaptercapabilitiesthatincludeadvancedfiltering,supportforkernelbypasstechnologies,losslesspacketcapture,andprecisiontimestamping.Thesenewcapabilitieswillofferavarietyofsecurityservicecombinationsthatourcustomerscanputtouse.Manufacturing,Assembly and TestingCurrently,allMulticomputerprod
106、uctsareshippedtoourcustomersdirectlyfromourplantinLowell,Massachusetts.Ourmanufacturingactivitiesconsistmainlyoffinalassemblyandtestingofprintedcircuitboardsandsystemsthataredesignedbyusandfabricatedbyoutsidethird-partyvendors.Uponourreceiptofmaterialandcomponentsfromoutsidesuppliers,ourqualityassur
107、ancetechniciansinspecttheseproductsandcomponents.Duringmanufactureandassembly,bothsub-assembliesandcompletedsystemsaresubjectedtoextensivetesting,includingburn-inandenvironmentalstressscreeningdesignedtominimizeequipmentfailureatdeliveryandovertheusefulservicelifeofthesystem.Wealsousediagnosticprogr
108、amstodetectandisolate9TableofContentspotentialcomponentfailures.Acomprehensivelogismaintainedofpastfailurestomonitortheongoingreliabilityofourproductsandimprovedesignstandards.Currently,Myricomproducts,includingthenVoyappliancesandMyricomnetworkadapters,areshippedtoourcustomersdirectlyfromourplantin
109、Lowell,Massachusetts.Thepacketrecorderandpacketbrokerappliancesaresourcedfromthird-partypartners,integratedwithCSPisoftwareandresoldundertheCSPibrand.Ournetworkadaptersaredesignedin-houseandfabricatedbyoutsidethirdpartyvendors.Materialandcomponentsreceivedfromoutsidesuppliersareinspectedbyourquality
110、assurancetechnicians.TheARIASDSsolution(platformandapplications)willbedownloadedandlicensedfromserversorcontent-deliveryservicesdirectlycontrolledbyCSPi.TheARIAsoftwarecanbesoldinconjunctionwiththeMyricomSIA,orourappliances,whichmaybepreloadedwiththeappropriateimages.LicensingwillbehandledbytheARIAS
111、DSowhichwillbeaccessiblebyCSPislicensingseverstoallowproperflexibleservicesfeaturesetactivationandpayment.WeprovideawarrantycoveringdefectsarisingfromthesaleofMulticomputerandMyricomproducts,whichvariesfrom90daystothreeyears,dependingupontheparticularunitinquestion.Sources and Availability of Raw Ma
112、terialsSeveralcomponentsusedinourHPPsegmentproductsareobtainedfromsole-sourcesuppliers.WearedependentonkeyvendorssuchasXilinxorNXPforavarietyofprocessorsforcertainproductsandWindRiverSystems,Inc.forVxWorksoperatingsystemsoftware.Despiteourdependenceonthesesole-sourcesuppliers,basedonourcurrentforeca
113、standourprojectedsalesobligations,webelievewehaveadequateinventoryonhandandourcurrentnear-termrequirementscanbemetintheexistingsupplychain.Research and DevelopmentFortheyearendedSeptember30,2019,ourexpensesforR&Dwereapproximately$2.8millioncomparedtoapproximately$3.3millionforfiscalyear2018.Expendit
114、uresforR&Dareexpensedastheyareincurred.Productdevelopmenteffortsinfiscalyear2019involveddevelopmentoftheARIASDSproductset,andenhancementstoourMyricomproducts,inwhichweexpecttocontinuetomakeinvestmentsrelatedtothedevelopmentofnewhardwareadapterproductsandtheARIASDSsoftwarethatenablesthehardwaretomeet
115、theneedsofspecificapplications.OurcurrentR&Dplanisintendedtoextendtheusefulnessandmarketabilityoftheseproductsbyaddingfeaturesandcapabilitiestomeettheneedsofourmarkets.Intellectual PropertyWerelyonacombinationoftrademarkandtradesecretlawsintheUnitedStatesandotherjurisdictions,aswellasconfidentiality
116、proceduresandcontractualprovisionstoprotectourintellectualpropertyrights.WehavetwopendingpatentsfortheARIASDSsoftwareandwillbepursuingadditionalpatentrightsovertime.BacklogThebacklogofcustomerordersandcontractsintheHPPsegmentwasapproximately$0.5millionatSeptember30,2019ascomparedto$1.0millionatSepte
117、mber30,2018.Ourbacklogcanfluctuategreatly.Thesepossiblelargefluctuationscanbeduetothetimingofreceiptoflargeordersoftenforpurchasesfromprimecontractorsforsalestothegovernment.ItisexpectedthatallofthecustomerordersinbacklogwillshipwithinthenexttwelvemonthsfromSeptember30,2019.10TableofContentsSignific
118、ant CustomersSeeNote18inthenotestotheconsolidatedfinancialstatementsfordetailedinformationregardingcustomerswhichcomprised10%ormoreofconsolidatedrevenuesfortheyearsendedSeptember30,2019and2018.EmployeesAsofSeptember30,2019,wehadapproximately114fulltimeequivalentemployeesworldwideforourconsolidatedop
119、erations.Noneofouremployeesarerepresentedbyalaborunionandwehavehadnoworkstoppagesinthelastthreefiscalyears.Weconsiderrelationswithouremployeestobegood.Company WebsiteTheCompanysinternetaddressishttp:/.Throughthataddress,theCompanysAnnualReportonForm10K,quarterlyreportsonForm10Q,currentreportsonForm8
120、KandamendmentstothosereportsareavailablefreeofchargeassoonasreasonablypracticableaftertheyarefiledwiththeUnitedStatesSecuritiesandExchangeCommission(SecuritiesandExchangeCommissionorCommission).TheinformationcontainedontheCompanyswebsiteisnotincludedin,norincorporatedbyreferenceinto,thisannualreport
121、onForm10K.Financial Information about Geographic AreasInformationregardingoursalesbygeographicareaandpercentageofsalesbasedonthelocationtowhichtheproductsareshippedorservicesrenderedareinNote18ofthenotestotheconsolidatedfinancialstatements.Item 1A.Risk FactorsIf any of the risks and uncertainties se
122、t forth below actually materialize,our business,financial condition and/orresults of operations could be materially and adversely affected,the trading price of our common stock could decline and astockholder could lose all or part of its,his or her investment.The risks and uncertainties set forth be
123、low are not the only oneswe face.Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impairour business operations.We depend on a small number of customers for a significant portion of our revenue and loss of any customer couldsignificantly
124、affect our business.BoththeHPPandTSsegmentsarereliantuponasmallnumberofsignificantcustomers,andthelossoforsignificantreductioninsalestoanyoneofwhichcouldhaveamaterialadverseeffectonourbusiness.ForthefiscalyearendedSeptember30,2019,onecustomeraccountedforapproximately$10.2millioninrevenue,or13%ofourt
125、otalrevenuesforthefiscalyear.Inaddition,ourrevenuesarelargelydependentupontheabilityofourcustomerstocontinuetogroworneedservicesortodevelopandsellproductsthatincorporateourproducts.Noassurancecanbegiventhatourcustomerswillnotexperiencefinancialorotherdifficultiesthatcouldadverselyaffecttheiroperatio
126、nsand,inturn,ourresultsofoperations.We depend on key personnel and skilled employees and face competition in hiring and retaining qualified employees.Wearelargelydependentupontheskillsandeffortsofourseniormanagement,managerial,salesandtechnicalemployees.Noneofourseniormanagementpersonnelorotherkeyem
127、ployeesaresubjecttoanyemploymentcontractsexceptVictorDellovo,ourChiefExecutiveOfficerandPresident.Thelossofservicesofanyofourexecutivesorotherkeypersonnelcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Ourfuturesuccesswilldependtoasignificantextentonourabilityto
128、attract,train,motivateandretainhighlyskilledtechnicalprofessionals.Ourabilitytomaintainandrenewexistingengagementsandobtainnewbusinessdepends,inlargepart,onourabilitytohireandretaintechnicalpersonnelwiththeskillsthatkeeppacewithcontinuingchangesinourindustrystandardsandtechnologies.Theinabilitytohir
129、eadditionalqualifiedpersonnelcouldimpairourabilityto11TableofContentssatisfyorgrowourclientbase.Therecanbenoassurancethatwewillbesuccessfulinretainingcurrentorfutureemployees.Our success depends in part on our timely introduction of new products and technologies and our results can beimpacted by the
130、 effectiveness of our significant investments in new products and technologiesWehavemadesignificantinvestmentsinourAriaSDScybersecurityproductsandservicesthatmaynotachieveexpectedreturns.Wewillcontinuetomakesignificantinvestmentsinresearch,development,andmarketingforAriaproducts,services,andtechnolo
131、gies.Commercialsuccessdependsonmanyfactors,includinginnovativeness,developersupport,andeffectivedistributionandmarketing.Ifcustomersdonotperceiveourlatestofferingsasprovidingsignificantnewfunctionalityorothervalue,theymayreducetheirpurchasesofnewsoftwareandhardwareproductsorupgrades,unfavorablyaffec
132、tingrevenue.Wemaynotachievesignificantrevenuefromnewproduct,service,anddistributionchannelinvestmentsforseveralyears.Newproductsandservicesmaynotbeprofitable,andeveniftheyareprofitable,operatingmarginsforsomenewproductsandbusinessesmaynotbeashighasthemarginswehaveexperiencedhistorically.Developingne
133、wtechnologiesandproductsiscomplex.Itcanrequirelongdevelopmentandtestingperiods.Significantdelaysinnewreleasesorsignificantproblemsincreatingnewproductsorservicescouldadverselyaffectourrevenue.We depend on contracts with the federal government,primarily with the Department of Defense(DoD),for asignif
134、icant portion of our revenue,and our business could be seriously harmed if the government significantly decreased orceased doing business with us.Wederived4%ofourtotalrevenueinfiscalyear2019and6%ofourtotalrevenueinfiscalyear2018fromtheDoDasasubcontractor.WeexpectthattheDoDcontractswillcontinuetobeim
135、portanttoourbusinessfortheforeseeablefuture.Ifweweresuspendedordebarredfromcontractingwiththefederalgovernmentgenerally,theGeneralServicesAdministration,oranysignificantagencyintheintelligencecommunityortheDoD,ifourreputationorrelationshipwithgovernmentagenciesweretobeimpaired,orifthegovernmentother
136、wiseceaseddoingbusinesswithusorsignificantlydecreasedtheamountofbusinessitdoeswithus,ourbusiness,prospects,financialconditionandoperatingresultswouldbemateriallyandadverselyaffected.To be successful,we must respond to the rapid changes in technology.If we are unable to do so on a timely basis ourbus
137、iness could be materially adversely affected.Ourfuturesuccesswilldependinlargepartonourabilitytoenhanceourcurrentproductsandtodevelopnewcommercialproductsonatimelyandcost-effectivebasisinordertorespondtotechnologicaldevelopmentsandchangingcustomerneeds.Thedesign-inprocessistypicallylengthyandexpensi
138、veandtherecanbenoassurancethatwewillbeabletocontinuetomeettheproductspecificationsofourcustomersinatimelyandadequatemanner.Inaddition,ifwefailtoanticipateortorespondadequatelytochangesintechnologyandcustomerpreferences,orifthereisanysignificantdelayinproductdevelopmentsorintroductions,thiscouldhavea
139、materialadverseeffectonourbusiness,financialconditionandresultsofoperations,includingtheriskofinventoryobsolescence.Becauseofthecomplexityofourproducts,wehaveexperienceddelaysfromtimetotimeincompletingproductsonatimelybasis.Ifweareunabletodesign,developorintroducecompetitivenewproductsonatimelybasis
140、,ourfutureoperatingresultswouldbeadverselyaffected,particularlyinourHPPsegment.Therecanbenoassurancethatwewillbesuccessfulindevelopingnewproductsorenhancingourexistingproductsonatimelyorcost-effectivebasis,orthatsuchnewproductsorproductenhancementswillachievemarketacceptance.We rely on single source
141、s for supply of certain components and our business may be seriously harmed if our supply ofany of these components or other components is disrupted.SeveralcomponentsusedinourHPPproductsarecurrentlyobtainedfromsole-sourcesuppliers.WearedependentonkeyvendorslikeMellanoxTechnologiesforourhigh-speedint
142、erconnectcomponents.Generally,suppliersmayterminateourpurchaseorderswithoutcauseupon30daysnoticeandmayceaseofferingproductstousupon180daysnotice.Althoughwedonotconsidertheriskofinterruptionofsupplytobeasignificantriskinthenearterm,ifinthefuture,MellanoxTechnologiesweretolimitorreducethesaleofsuchcom
143、ponentstous,oriftheseorother12TableofContentscomponentsuppliers,someofwhicharesmallcompanies,weretoexperiencefuturefinancialdifficultiesorotherproblemswhichcouldpreventthemfromsupplyingthenecessarycomponents,sucheventscouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperati
144、ons.Thesesolesourceandothersuppliersareeachsubjecttoqualityandperformancerisks,materialsshortages,excessdemand,reductionincapacityandotherfactorsthatmaydisrupttheflowofgoodstousorourcustomers,whichtherebymayadverselyaffectourbusinessandcustomerrelationships.Wehavenoguaranteedsupplyarrangementswithou
145、rsuppliersandtherecanbenoassurancethatoursupplierswillcontinuetomeetourrequirements.Ifoursupplyarrangementsareinterrupted,therecanbenoassurancethatwewouldbeabletofindanothersupplieronatimelyorsatisfactorybasis.Anyshortageorinterruptioninthesupplyofanyofthecomponentsusedinourproducts,ortheinabilityto
146、procurethesecomponentsfromalternatesourcesonacceptableterms,couldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Therecanbenoassurancethatsevereshortagesofcomponentswillnotoccurinthefuture.Suchshortagescouldincreasethecostordelaytheshipmentofourproducts,whichcouldhav
147、eamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Significantincreasesinthepricesofthesecomponentswouldalsomateriallyadverselyaffectourfinancialperformancesincewemaynotbeabletoadjustproductpricingtoreflecttheincreaseincomponentcosts.Wecouldincurset-upcostsanddelaysinmanuf
148、acturingshoulditbecomenecessarytoreplaceanykeyvendorsduetoworkstoppages,shippingdelays,financialdifficultiesorotherfactorsand,undercertaincircumstances,thesecostsanddelayscouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Our international operation is subject to a
149、 number of risks.WemarketandsellourproductsincertaininternationalmarketsandwehaveestablishedoperationsintheU.K.ThesaleofourGermanoperationinfiscalyear2018istreatedasdiscontinuedoperationsinour2018financialstatements.Foreign-basedrevenueisdeterminedbasedonthelocationtowhichtheproductisshippedorservic
150、esarerenderedandrepresented8%and17%ofourtotalrevenueforthefiscalyearsendedSeptember30,2019and2018,respectively.Ifrevenuesgeneratedbyforeignactivitiesarenotadequatetooffsettheexpenseofestablishingandmaintainingtheseforeignactivities,ourbusiness,financialconditionandresultsofoperationscouldbemateriall
151、yadverselyaffected.Inaddition,therearecertainrisksinherentintransactingbusinessinternationally,suchaschangesinapplicablelawsandregulatoryrequirements,exportandimportrestrictions,exportcontrolsrelatingtotechnology,tariffsandothertradebarriers,longerpaymentcycles,problemsincollectingaccountsreceivable
152、,politicalinstability,fluctuationsincurrencyexchangerates,expatriationcontrolsandpotentialadversetaxconsequences,anyofwhichcouldadverselyimpactthesuccessofourinternationalactivities.Inparticular,itispossibleactivityintheUnitedKingdomandtherestofEuropewillbeadverselyimpactedandthatwewillfaceincreased
153、regulatoryandlegalcomplexities,includingthoserelatedtotax,trade,andemployeerelationsasaresultofBrexit.Aportionofourrevenuesarefromsalestoforeignentities,includingforeigngovernments,whichareprimarilypaidintheformofforeigncurrencies.Therecanbenoassurancethatoneormoreofsuchfactorswillnothaveamaterialad
154、verseeffectonourfutureinternationalactivitiesand,consequently,onourbusiness,financialconditionorresultsofoperations.Systems failures may disrupt our business and have an adverse effect on our results of operations.Anysystemsfailures,includingnetwork,softwareorhardwarefailures,whethercausedbyus,athir
155、dpartyserviceprovider,unauthorizedintrudersandhackers,computerviruses,naturaldisasters,powershortagesorterroristattacks,couldcauselossofdataorinterruptionsordelaysinourbusinessorthatofourclientsandreputationalharmasasecurityprovider.Likeothercompanies,wehaveexperiencedcybersecuritythreatstoourdataan
156、dsystems,ourcompanysensitiveinformation,andourinformationtechnologyinfrastructure,includingmalwareandcomputervirusattacks,unauthorizedaccess,systemsfailuresandtemporarydisruptions.Wemayexperiencesimilarsecuritythreatsatcustomersitesthatweoperateandmanageasacontractualrequirement.Priorcyberattacksdir
157、ectedatushavenothadamaterialadverseimpactonourbusinessorourfinancialresults,andwebelievethatourcontinuingcommitmenttowardthreatdetectionandmitigationprocessesandprocedureswillavoidsuchimpactinthefuture.Duetotheevolvingnatureofthesesecuritythreats,however,theimpactofanyfutureincidentcannotbepredicted
158、.13TableofContentsInaddition,thefailureordisruptionofouremail,communicationsorutilitiescouldcauseustointerruptorsuspendouroperationsorotherwiseharmourbusiness.Ourpropertyandbusinessinterruptioninsurancemaybeinadequatetocompensateusforalllossesthatmayoccurasaresultofanysystemoroperationalfailureordis
159、ruptionand,asaresult,ouractualresultscoulddiffermateriallyandadverselyfromthoseanticipated.Thesystemsandnetworksthatwemaintainforourclients,althoughhighlyredundantintheirdesign,couldalsofail.Ifasystemornetworkwemaintainweretofailorexperienceserviceinterruptions,wemightexperiencelossofrevenueorfacecl
160、aimsfordamagesorcontracttermination.Ourerrorsandomissionsliabilityinsurancemaybeinadequatetocompensateusforallthedamagesthatwemightincurand,asaresult,ouractualresultscoulddiffermateriallyandadverselyfromthoseanticipated.We face competition that could adversely affect our sales and profitability.Them
161、arketsforourproductsarehighlycompetitiveandarecharacterizedbyrapidlychangingtechnology,frequentproductperformanceimprovementsandevolvingindustrystandards.Manyofourcompetitorsaresubstantiallylargerthanweareandhavegreateraccesstocapitalandhumanresourcesandinmanycasespricetheirproductsandserviceslessth
162、anours.Inaddition,duetotherapidlychangingnatureoftechnology,newcompetitorsmayemerge.Competitorsmaybeabletooffermoreattractivepricingordevelopproductsthatcouldofferperformancefeaturesthataresuperiortoourproducts,resultinginreduceddemandforourproducts.Suchcompetitorscouldhaveanegativeimpactonourabilit
163、ytowinfuturebusinessopportunities.Therecanbenoassurancethatanewcompetitorwillnotattempttopenetratethevariousmarketsforourproductsandservices.Theirentryintomarketshistoricallytargetedbyuscouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Our business could be advers
164、ely affected by changes in budgetary priorities of the federal government.Becausewederiveasignificantpercentageofourrevenuefromcontractswiththefederalgovernment,changesinfederalgovernmentbudgetaryprioritiescoulddirectlyaffectourfinancialperformance.Asignificantdeclineingovernmentexpenditures,ashifto
165、fexpendituresawayfromprogramsthatwesupportorachangeinfederalgovernmentcontractingpoliciescouldcausefederalgovernmentagenciestoreducetheirpurchasesundercontracts,toexercisetheirrighttoterminatecontractsatanytimewithoutpenaltyornottoexerciseoptionstorenewcontracts.InyearswhenCongressdoesnotcompleteits
166、budgetprocessbeforetheendofitsfiscalyear(September30),governmentoperationsarefundedthroughacontinuingresolution(CR)thattemporarilyfundsfederalagencies.RecentCRshavegenerallyprovidedfundingatthelevelsprovidedinthepreviousfiscalyearandhavenotauthorizednewspendinginitiatives.Whenthefederalgovernmentope
167、ratesunderaCR,delayscanoccurintheprocurementofproductsandservices.Historically,suchdelayshavenothadamaterialeffectonourbusiness;however,shouldfundingofthefederalgovernmentbyCRbeprolongedorextended,itcouldhavesignificantconsequencestoourbusinessandourindustry.Additionally,ourbusinesscouldbeseriouslya
168、ffectedifchangesinDoDprioritiesreducesthedemandforourservicesoncontractssupportingsomeoperationsandmaintenanceactivitiesorifweexperienceanincreaseinset-asidesforsmallbusinesses,whichcouldresultinourinabilitytocompetedirectlyforcontracts.U.S.Federal government contracts contain numerous provisions th
169、at are unfavorable to us.U.S.Federalgovernmentcontractscontainprovisionsandaresubjecttolawsandregulationsthatgivethegovernmentrightsandremedies,someofwhicharenottypicallyfoundincommercialcontracts,includingallowingthegovernmentto:cancelmulti-yearcontractsandrelatedordersiffundsforcontractperformance
170、foranysubsequentyearbecomeunavailable;claimrightsinsystemsandsoftwaredevelopedbyus;14TableofContentssuspendordebarusfromdoingbusinesswiththefederalgovernmentorwithagovernmentalagency;imposefinesandpenaltiesandsubjectustocriminalprosecution;andcontrolorprohibittheexportofourdataandtechnology.Ifthegov
171、ernmentterminatesacontractforconvenience,wemayrecoveronlyourincurredorcommittedcosts,settlementexpensesandprofitonworkcompletedpriortothetermination.Ifthegovernmentterminatesacontractfordefault,wemaybeunabletorecovereventhoseamounts,andinsteadmaybeliableforexcesscostsincurredbythegovernmentinprocuri
172、ngundelivereditemsandservicesfromanothersource.Dependingonthevalueofacontract,suchterminationcouldcauseouractualresultstodiffermateriallyandadverselyfromthoseanticipated.Asiscommonwithgovernmentcontractors,wehaveexperiencedandcontinuetoexperienceoccasionalperformanceissuesundercertainofourcontracts.
173、Dependinguponthevalueofthemattersaffected,aperformanceproblemthatimpactsourperformanceofaprogramorcontractcouldcauseouractualresultstodiffermateriallyandadverselyfromthoseanticipated.We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitive
174、advantage.Ourabilitytocompeteeffectivelyagainstothercompaniesinourindustrydepends,inpart,onourabilitytoprotectourcurrentandfutureproprietarytechnologyunderpatent,copyright,trademark,tradesecretandunfaircompetitionlaws.WecannotassurethatourmeansofprotectingourproprietaryrightsintheUnitedStatesorabroa
175、dwillbeadequate,orthatotherswillnotdeveloptechnologiessimilarorsuperiortoourtechnologyordesignaroundourproprietaryrights.Inaddition,wemayincursubstantialcostsinattemptingtoprotectourproprietaryrights.Also,despitethestepstakenbyustoprotectourproprietaryrights,itmaybepossibleforunauthorizedthirdpartie
176、stocopyorreverse-engineeraspectsofourproductsdevelopsimilartechnologyindependentlyorotherwiseobtainanduseinformationthatweregardasproprietaryandwemaybeunabletosuccessfullyidentifyorprosecuteunauthorizedusesofourtechnology.Furthermore,withrespecttoourissuedpatentsandpatentapplications,wecannotassuret
177、hatpatentsfromanypendingpatentapplications(orfromanyfuturepatentapplications)willbeissued,thatthescopeofanypatentprotectionwillexcludecompetitorsorprovidecompetitiveadvantagestous,thatanyofourpatentswillbeheldvalidifsubsequentlychallengedorthatotherswillnotclaimrightsinorownershipofthepatents(andpat
178、entapplications)andotherproprietaryrightsheldbyus.If we become subject to intellectual property infringement claims,we could incur significant expenses and could beprevented from selling specific products.Wemaybecomesubjecttoclaimsthatweinfringetheintellectualpropertyrightsofothersinthefuture.Wecann
179、otassurethat,ifmade,theseclaimswillnotbesuccessful.Anyclaimofinfringementcouldcauseustoincursubstantialcostsdefendingagainsttheclaimeveniftheclaimisinvalid,andcoulddistractmanagementfromotherbusiness.Anyjudgmentagainstuscouldrequiresubstantialpaymentindamagesandcouldalsoincludeaninjunctionorothercou
180、rtorderthatcouldpreventusfromofferingcertainproducts.Our need for continued or increased investment in research and development may increase expenses and reduce ourprofitability.Ourindustryischaracterizedbytheneedforcontinuedinvestmentinresearchanddevelopment.Ifwefailtoinvestsufficientlyinresearchan
181、ddevelopment,ourproductscouldbecomelessattractivetopotentialcustomersandourbusinessandfinancialconditioncouldbemateriallyandadverselyaffected.Asaresultoftheneedtomaintainorincreasespendinglevelsinthisareaandthedifficultyinreducingcostsassociatedwithresearchanddevelopment,ouroperatingresultscouldbema
182、teriallyharmedifourresearchanddevelopmenteffortsfailtoresultinnewproductsorifrevenuesfallbelowexpectations.Inaddition,asaresultofourcommitmenttoinvestinresearchanddevelopment,spendinglevelsofresearchanddevelopmentexpensesasapercentageofrevenuesmayfluctuateinthefuture.15TableofContentsOur results of
183、operations are subject to fluctuation from period to period and may not be an accurate indication offuture performance.Wehaveexperiencedfluctuationsinoperatingresultsinlargepartduetothesaleofproductsandservicesinrelativelylargedollaramountstoarelativelysmallnumberofcustomers.Customersspecifydelivery
184、daterequirementsthatcoincidewiththeirneedforourproductsandservices.Becausethesecustomersmayuseourproductsandservicesinconnectionwithavarietyofdefenseprogramsorotherprojectswithdifferentsizesanddurations,acustomersordersforonequartergenerallydonotindicateatrendforfutureordersbythatcustomer.Assuch,weh
185、avenotbeenableinthepasttoconsistentlypredictwhenourcustomerswillplaceordersandrequestshipmentssothatwecannotalwaysaccuratelyplanourmanufacturing,inventory,andworkingcapitalrequirements.Asaresult,ifordersandshipmentsdifferfromwhatwepredict,wemayincuradditionalexpensesandbuildexcessinventory,whichmayr
186、equireadditionalreservesandallowancesandreduceourworkingcapitalandoperationalflexibility.Anysignificantchangeinourcustomerspurchasingpatternscouldhaveamaterialadverseeffectonouroperatingresultsandreportedearningspershareforaparticularquarter.Thus,resultsofoperationsinanyperiodshouldnotbeconsideredin
187、dicativeoftheresultstobeexpectedforanyfutureperiod.Highquarterlybook-shipratiosmaypressureinventoryandcashflowmanagement,necessitatingincreasedinventorybalancestoensurequarterlyrevenueattainment.Increasedinventorybalancestieupadditionalcapital,limitingouroperationalflexibility.Someofourcustomersmayh
188、avebecomeconditionedtowaituntiltheendofaquartertoplaceordersintheexpectationofreceivingadiscount.Customersconditionedtoseekquarter-enddiscountsincreaseriskanduncertaintyinourfinancialforecastinganddecreaseourmarginsandprofitability.Ourquarterlyresultsmaybesubjecttofluctuationsresultingfromanumberofo
189、therfactors,including:delaysincompletionofinternalproductdevelopmentprojects;delaysinshippinghardwareandsoftware;delaysinacceptancetestingbycustomers;achangeinthemixofproductssoldtoourservedmarkets;changesincustomerorderpatterns;productiondelaysduetoqualityproblemswithoutsourcedcomponents;inabilityt
190、oscalequickreactioncapabilityproductsduetolowproductvolume;shortagesandcostsofcomponents;thetimingofproductlinetransitions;declinesinquarterlyrevenuesfrompreviousgenerationsofproductsfollowingannouncementofreplacementproductscontainingmoreadvancedtechnology;inabilitytorealizetheexpectedbenefitsfroma
191、cquisitionsandrestructurings,ordelaysinrealizingsuchbenefits;potentialassetimpairment,includinggoodwillandintangibles,write-offofdeferredtaxassetsorrestructuringcharges;andchangesinestimatesofcompletiononfixedpriceserviceengagements.16TableofContentsInaddition,fromtimetotime,wehaveenteredintocontrac
192、ts,referredtoasdevelopmentcontracts,toengineeraspecificsolutionbasedonmodificationstostandardproducts.Grossmarginsfromdevelopmentcontractrevenuesaretypicallylowerthangrossmarginsfromstandardproductrevenues.Weintendtocontinuetoenterintodevelopmentcontractsandanticipatethatthegrossmarginsassociatedwit
193、hdevelopmentcontractrevenueswillcontinuetobelowerthangrossmarginsfromstandardproductsales.Anotherfactorcontributingtofluctuationsinourquarterlyresultsisthefixednatureofexpendituresonpersonnel,facilitiesandmarketingprograms.Expenselevelsfortheseprogramsarebased,insignificantpart,onexpectationsoffutur
194、erevenues.Ifactualquarterlyrevenuesarebelowmanagementsexpectations,ourresultsofoperationswilllikelybeadverselyaffected.Further,thepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesrequiresustomakeestimatesandassumptionsthataffectthereportedamountso
195、fassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedatesofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiods.Actualresultscoulddifferfromthoseestimates,andchangesinestimatesinsubsequentperiodscouldcauseourresultsofoperationstofluctuate.Chang
196、es in regulations could materially adversely affect us.Ourbusiness,resultsofoperations,orfinancialconditioncouldbemateriallyadverselyaffectediflaws,regulations,orstandardsrelatingtousorourproductsarenewlyimplementedorchanged.Inaddition,ourcompliancewithexistingregulationsmayhaveamaterialadverseimpac
197、tonus.Underapplicablefederalsecuritieslaws,wearerequiredtoevaluateanddeterminetheeffectivenessofourinternalcontrolstructureandprocedures.Ifwehaveamaterialweaknessinourinternalcontrols,ourresultsofoperationsorfinancialconditionmaybemateriallyadverselyaffectedorourstockpricemaydecline.If we experience
198、 a disaster or other business continuity problem,we may not be able to recover successfully,whichcould cause material financial loss,loss of human capital,regulatory actions,reputational harm,or legal liability.Ifweexperiencealocalorregionaldisasterorotherbusinesscontinuityproblem,suchasahurricane,e
199、arthquake,terroristattack,pandemicorothernaturalorman-madedisaster,ourcontinuedsuccesswilldepend,inpart,ontheavailabilityofourpersonnel,ourofficefacilities,andtheproperfunctioningofourcomputer,telecommunicationandotherrelatedsystemsandoperations.Asweattempttogrowouroperations,thepotentialforparticul
200、artypesofnaturalorman-madedisasters,political,economicorinfrastructureinstabilities,orothercountry-orregion-specificbusinesscontinuityrisksincreases.If we suffer any data breaches involving the designs,schematics,or source code for our products or other sensitiveinformation,our business and financia
201、l results could be adversely affected.Wesecurelystoreourdesigns,schematics,andsourcecodeforourproductsastheyarecreated.Abreach,whetherphysical,electronicorotherwise,ofthesystemsonwhichthissensitivedataisstoredcouldleadtodamageorpiracyofourproducts.Ifwearesubjecttodatasecuritybreachesfromexternalsour
202、cesorfromaninsiderthreat,wemayhavealossinsalesorincreasedcostsarisingfromtherestorationorimplementationofadditionalsecuritymeasures,eitherofwhichcouldadverselyaffectourbusinessandfinancialresults.Otherpotentialcostscouldincludelossofbrandvalue,incidentresponsecosts,lossofstockmarketvalue,regulatoryi
203、nquiries,litigation,andmanagementdistraction.Inaddition,asecuritybreachthatinvolvedclassifiedinformationcouldsubjectustocivilorcriminalpenalties,lossofagovernmentcontract,lossofaccesstoclassifiedinformation,ordebarmentasagovernmentcontractor.Similarly,abreachthatinvolvedlossofcustomer-provideddataco
204、uldsubjectustolossofacustomer,lossofacontract,litigationcostsandlegaldamages,andreputationalharm.17TableofContentsWe need to continue to expend resources on research and development(R&D)efforts,particularly our HPP segment,to meet the needs of our customers.If we are unable to do so,our products cou
205、ld become less attractive to customers and ourbusiness could be materially adversely affected.OurindustryrequiresacontinuedinvestmentinR&D.AsaresultofourneedtomaintainorincreaseourspendinglevelsforR&DinthisareaandthedifficultyinreducingcostsassociatedwithR&D,ouroperatingresultscouldbemateriallyharme
206、difourrevenuesfallbelowexpectations.Inaddition,asaresultofCSPIscommitmenttoinvestinR&D,spendingasapercentofrevenuesmayfluctuateinthefuture.Further,ifwefailtoinvestsufficientlyinR&DorourR&Ddoesnotproducecompetitiveresults,ourproductsmaybecomelessattractivetoourcustomersorpotentialcustomers,whichcould
207、materiallyharmourbusinessandresultsofoperations.Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internalcontrols over financial reporting.Effectiveinternalcontroloverfinancialreportinganddisclosurecontrolsandproceduresarenecessaryforustop
208、rovidereliablefinancialandotherreportsandeffectivelypreventfraud.Thesetypesofcontrolsaredesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandtheproperpreparationofourfinancialstatements,aswellasregardingthetimelyreportingofmaterialinformation.Ifwecannotmaintaineffectivei
209、nternalcontroloverfinancialreportingordisclosurecontrolsandprocedures,orprovidereliablefinancialstatementsorSECreportsorpreventfraud,investorsmayloseconfidenceinourreportedfinancialinformation,ourcommonstockcouldbesubjecttodelistingonthestockexchangewhereitistraded,ouroperatingresultsandthetradingpr
210、iceofourcommonstockcouldsufferandwemightbecomesubjecttolitigation.Whileourmanagementwillcontinuetoreviewtheeffectivenessofourinternalcontroloverfinancialreportinganddisclosurecontrolsandprocedures,thereisnoassurancethatourdisclosurecontrolsandproceduresorourinternalcontroloverfinancialreportingwillb
211、eeffectiveinaccomplishingallcontrolobjectives,includingthepreventionanddetectionoffraud,allofthetime.Our stock price may continue to be volatileHistorically,themarketfortechnologystockshasbeenextremelyvolatile.Ourcommonstockhasexperiencedandmaycontinuetoexperiencesubstantialpricevolatility.Thefollow
212、ingfactorscouldcausethemarketpriceofourcommonstocktofluctuatesignificantly:lossofamajorcustomer;lossofamajorsupplier;theadditionordepartureofkeypersonnel;variationsinourquarterlyoperatingresults;announcementsbyusorourcompetitorsofsignificantcontracts,newproductsorproductenhancements;acquisitions,dis
213、tributionpartnerships,jointventuresorcapitalcommitments;regulatorychanges;salesofourcommonstockorothersecuritiesinthefuture;changesinmarketvaluationsoftechnologycompanies;andfluctuationsinstockmarketpricesandvolumes.18TableofContentsInaddition,thestockmarketingeneralandtheNASDAQGlobalMarketandtechno
214、logycompaniesinparticular,haveexperiencedextremepriceandvolumefluctuationsthathaveoftenbeenunrelatedordisproportionatetotheoperatingperformanceofsuchcompanies.Thesebroadmarketandindustryfactorsmaymateriallyadverselyaffectthemarketpriceofourcommonstock,regardlessofouractualoperatingperformance.Inthep
215、ast,followingperiodsofvolatilityinthemarketpriceofacompanyssecurities,securitiesclassactionlitigationhasoftenbeeninstitutedagainstsuchcompanies.Ifanyshareholdersweretoissuealawsuit,wecouldincursubstantialcostsdefendingthelawsuitandtheattentionofmanagementcouldbediverted.Item 2.PropertiesListedbelowa
216、reourprincipalfacilitiesasofSeptember30,2019.Managementconsidersallfacilitieslistedbelowtobesuitableforthepurpose(s)forwhichtheyareused,includingmanufacturing,researchanddevelopment,sales,marketing,serviceandadministration.Owned orApproximateLocationPrincipal UseLeasedFloor AreaTS Segment Properties
217、:Modcomp,Inc.DivisionHeadquartersLeased11,815S.F.1182EastNewportCenterDriveSales,MarketingandDeerfieldBeach,FL33442AdministrationModcomp,Ltd.Sales,MarketingandLeased887S.F.TrinityCourt,MollyMillarsLaneAdministrationWokingham,Berkshire UnitedKingdom HPP Segment Properties:CSPInc.CorporateHeadquarters
218、Leased13,515S.F.175CabotStreet,Suite210Manufacturing,Sales,Lowell,MA01854MarketingandAdministrationItem 3.Legal ProceedingsWearecurrentlynotapartytoanymateriallegalproceedings.Item 4.Mine Safety DisclosuresNotApplicable.19TableofContentsPART IIItem 5.Market for Registrants Common Equity,Related Stoc
219、kholder Matters and Issuer Purchases of Equity SecuritiesMarket information.OurcommonstockistradedontheNasdaqGlobalMarketunderthesymbolCSPI.ThefollowingtableprovidesthehighandlowsalespricesofourcommonstockasreportedontheNasdaqGlobalMarketfortheperiodsindicated.20192018Fiscal Year:HighLowHighLow1stQu
220、arter$13.45$8.78$17.00$10.602ndQuarter$11.92$9.31$18.89$10.413rdQuarter$15.50$10.30$12.18$8.754thQuarter$15.18$12.21$14.87$9.71Stockholders.Wehadapproximately65holdersofrecordofourcommonstockasofDecember3,2019.Thisnumberdoesnotincludestockholdersforwhomshareswereheldina“nominee”or“street”name.Webeli
221、evethenumberofbeneficialownersofoursharesofcommonstock(includingsharesheldinstreetname)atthatdatewasapproximately1,450.Dividends.ForthefiscalyearsendedSeptember30,2019and2018,theCompanydeclaredandpaidcashdividendsasfollows:Amount PaidFiscal YearDate DeclaredRecord DateDate Paid Per Share201812/19/20
222、17 12/29/20171/16/2018$0.1120182/12/2018 2/28/2018 3/16/2018$0.1120185/9/2018 5/31/2018 6/15/2018$0.1120188/13/2018 8/31/2018 9/14/2018$0.15201912/27/2018 1/7/2019 1/22/2019$0.1520192/12/2019 2/28/2019 3/14/2019$0.1520195/8/2019 5/31/2019 6/14/2019$0.1520198/7/2019 8/30/2019 9/13/2019$0.15Item 7.Man
223、agements Discussion and Analysis of Financial Condition and Results of OperationsThis managements discussion and analysis of financial condition and results of operations and other portions of thisfiling contain forward-looking information that involves risks and uncertainties.Our actual results cou
224、ld differ materially fromthose anticipated by the forward-looking information.You should review the“Special Note Regarding Forward LookingStatements”and“Risk Factors”sections of this annual report for a discussion of important factors that could cause actualresults to differ materially from the resu
225、lts described in or implied by the forward-looking statements contained in the followingdiscussion and analysis.The following discussion should be read in conjunction with our financial statements and the relatednotes included elsewhere in this filing.Overview of Fiscal 2019 Results of Continuing Op
226、erationsRevenueincreasedbyapproximately$6.2million,or8%,to$79.1millionforthefiscalyearendedSeptember30,2019versus$72.9millionforthefiscalyearendedSeptember30,2018.Ourgrossprofitmarginpercentagedecreasedoverall,from25%ofrevenuesforthefiscalyearendedSeptember30,2018to23%forthefiscalyearendedSeptember3
227、0,2019.20TableofContentsWegeneratedanoperatinglossofapproximately$0.8millionforfiscalyearendedSeptember30,2019ascomparedtoanoperatinglossofapproximately$1.6millionforfiscalyearendedSeptember30,2018.OnJuly31,2018,wecompletedthesaleofalltheoutstandingstockofourGermanydivisionofourTSsegment.Theonetimeg
228、ainrecordedduetothesaleofallthestockofModcompGmbHwasapproximately$16.8million.Noincometaxeswereprovidedasthetransactionwasatax-freeexchangeintheU.K.TheModcompGmbHsresultshavebeenrecordedasdiscontinuedoperationsintheaccompanyingconsolidatedbalancesheetsandconsolidatedstatementsofoperationsforallperio
229、dspresented.Thefollowingtabledetailsourresultsofoperationsindollarsandasapercentageofsalesforthefiscalyearsended:%September 30,2019 of sales September 30,2018 of sales (Dollar amounts in thousands)Sales$79,061 100%$72,916 100%Costsandexpenses:Costofsales 61,035 77%54,517 75%Engineeringanddevelopment
230、 2,800 4%3,277 4%Selling,generalandadministrative 16,052 20%16,723 23%Totalcostsandexpenses 79,887 101%74,517 102%Operatingloss(826)(1)%(1,601)(2)%Otherincome 384%495 1%Lossbeforeincometaxes(442)(1)%(1,106)(2)%Incometax(benefit)expense(71)%882 1%Netlossfromcontinuingoperations(371)(1)%(1,988)(3)%Gai
231、nonsaleofdiscontinuedoperations%16,838 23%Netlossfromdiscontinuedoperations%(410)(1)%Totalincomefromdiscontinuedoperations%16,428 22%Net(loss)income$(371)(1)%$14,440 19%RevenuesRevenueincreasedbyapproximately$6.2million,or8%,to$79.1millionforthefiscalyearendedSeptember30,2019versus$72.9millionforthe
232、fiscalyearendedSeptember30,2018.OurHPPsegmentrevenuedecreasedbyapproximately$2.6millionprimarilyduetoadeclineof$1.7millioninroyaltyrevenues,adeclineof$0.2millioninMulticomputerservicerevenues,andadeclineof$1.6millioninMyricomproductrevenues,partiallyoffsetbya$0.9millionincreaseinMulticomputerproduct
233、revenues.OurTSsegmentrevenueincreasedbyapproximately$8.7millionfromanincreaseof$11.5millioninourU.S.division,partiallyoffsetwithadecreaseof$2.8millioninourU.K.division.TSsegmentrevenuechangebyproductandserviceslinesforthefiscalyearsendedSeptember30wereasfollows:Increase 2019 2018$%(Dollar amounts in
234、 thousands)Products$59,611$52,647$6,964 13%Services 11,548 9,790 1,758 18%Total$71,159$62,437$8,722 14%TheTSsegmenttotalrevenueincreasedbyapproximately$8.7millionduetoanincreaseof$11.5millioninourU.S.divisionpartiallyoffsetbyadecreaseof$2.8millioninourU.K.division.The$7.0millionincreaseinTS21Tableof
235、Contentssegmentproductrevenueisattributedtoanincreaseof$9.5millioninourU.S.divisionoffsetbyadecreaseof$2.5millioninourU.K.division.TheincreaseinourU.S.divisionwasprimarilyassociatedwithtwomajorcustomersandthedecreaseintheU.K.divisionwasprimarilyassociatedwithadecreasewithonemajorcustomer.The$1.8mill
236、ionservicerevenueincreaseisrelatedtoanincreaseintheU.S.divisionof$2.0million,partiallyoffsetbyadecreaseintheU.K.divisionof$0.2million.HPPsegmentrevenuechangebyproductandserviceslinesforthefiscalyearsendedSeptember30wereasfollows:Decrease20192018$%(Dollar amounts in thousands)Products$6,406$7,014$(60
237、8)(9)%Services 1,496 3,465 (1,969)(57)%Total$7,902$10,479$(2,577)(25)%ThedecreaseinHPPproductrevenuesfortheperiodof$0.6millionwasprimarilytheresultofanapproximately$1.5milliondecreaseinMyricomproductlineshipments,partiallyoffsetbyanincreaseinMulticomputerproductlineshipmentsofapproximately$0.9millio
238、nforthefiscalyearendedSeptember30,2019ascomparedtothefiscalyearendedSeptember30,2018.ThedecreaseinHPPservicesrevenuesofapproximately$2.0millionfortheperiodwasprimarilytheresultofanapproximately$1.7milliondecreaseinroyaltyrevenuesonhigh-speedprocessingboardsrelatedtotheE2Dprogramduringthefiscalyearen
239、dedSeptember30,2019ascomparedtothefiscalyearendedSeptember30,2018.Ourtotalrevenuesbygeographicareabasedonthelocationtowhichtheproductswereshippedorservicesrenderedwereasfollows:Increase(Decrease)2019%2018%$%(Dollar amounts in thousands)Americas$72,522 92%$60,458 83%$12,064 20%Europe 4,056 5%10,325 1
240、4%(6,269)(61)%Asia 2,483 3%2,133 3%350 16%Totals$79,061 100%$72,916 100%$6,145 8%The$12.1millionincreaseintheAmericasrevenuesforthefiscalyearendedSeptember30,2019ascomparedtothefiscalyearendedSeptember30,2018isprimarilyduetoincreasedrevenuesbyourTSsegmentofapproximately$15.2million,partiallyoffsetwi
241、thdecreasedsalesbyourHPPsegmentofapproximately$3.1million.The$6.3milliondecreaseinEuroperevenueisprimarilyduetodecreasedsalesbyourUKdivisionofapproximately$5.5millioncombinedwithadecreasebyourTSsegmentsUSdivisionofapproximately$0.3millionandadecreaseinourHPPsegmentofapproximately$0.5million.Thedecre
242、aseinsalestoEuropeisduetoonelargecustomerthathadsignificantlyloweractivityfortheyearendedSeptember30,2019whencomparedtoSeptember30,2018.The$0.4millionincreaseinAsiaisprimarilytheresultofincreasedrevenuesbyourHPPsegmentof$1.1millionpartiallyoffsetwitha$0.7milliondecreaseinourTSsegment.Gross MarginsOu
243、rgrossmargins(GM)decreasedbyapproximately$0.4millionto$18.0millioninfiscalyear2019ascomparedtogrossmarginsof$18.4millioninfiscalyear2018.22TableofContentsThefollowingtablesummarizesGMchangesbysegmentforfiscalyears2019and2018:20192018Increase(Decrease)(Dollar amounts in thousands)GM$GM%GM$GM%GM$GM%TS
244、$13,889 20%$12,262 20%$1,627%HPP 4,137 52%6,137 59%(2,000)(7)%Total$18,026 23%$18,399 25%$(373)(2)%TheimpactofproductmixwithinourTSsegmentongrossmarginsforthefiscalyearsendedSeptember30wasasfollows:20192018IncreaseGM$GM%GM$GM%GM$GM%(Dollar amounts in thousands)Products$7,462 13%$6,886 13%$576%Servic
245、es 6,427 56%5,376 55%1,051 1%Total$13,889 20%$12,262 20%$1,627%TheoverallTSsegmentgrossmarginasapercentageofsalesremainedthesameinfiscalyear2019whencomparedtofiscalyear2018.The$0.6millionincreaseinourTSsegmentproductgrossmarginsresultedfromanincreaseinproductrevenuesintheU.S.division,partiallyoffset
246、byadecreaseintheU.Kdivision.The$1.1millionincreaseintheTSsegmentservicegrossmarginsprimarilyresultedfromincreasedservicerevenuesintheU.S.division.TheimpactofproductmixongrossmarginswithinourHPPsegmentforthefiscalyearsendedSeptember30wasasfollows:20192018Increase(Decrease)(Dollar amounts in thousands
247、)GM$GM%GM$GM%GM$GM%Products$2,719 42%$2,775 40%$(56)2%Services 1,418 95%3,362 97%(1,944)(2)%Total$4,137 52%$6,137 59%$(2,000)(7)%TheoverallHPPsegmentgrossmarginsasapercentageofsalesdecreasedto52%infiscalyear2019from59%infiscalyear2018.The7%decreaseingrossmarginasapercentageofsalesintheHPPsegmentwasp
248、rimarilyattributedtotheimpactofadecreaseof$1.7millioninhighmarginMulticomputerroyaltyrevenues.Engineering and Development ExpensesThefollowingtabledetailsourengineeringanddevelopmentexpensesbyoperatingsegmentforthefiscalyearsendedSeptember30,2019and2018:For the Year ended September 30,%of%of(Dollar
249、amounts in thousands)2019Total2018Total$Decrease%Decrease(Dollar amounts in thousands)By Operating Segment:TS$%$%$%HPP2,800 100%3,277 100%(477)(15)%Total$2,800 100%$3,277 100%$(477)(15)%Engineeringanddevelopmentexpensesdecreasedby$0.5millionto$2.8millionforthefiscalyearendedSeptember30,2019ascompare
250、dto$3.3millionforthefiscalyearendedSeptember30,2018.Thecurrentfiscalyearexpenseswereprimarilyforproductengineeringexpensesincurredinconnectionwiththedevelopmentofthenew23TableofContentsARIASDScybersecurityproducts.ThedecreasedengineeringanddevelopmentexpensesforthefiscalyearendedSeptember30,2019asco
251、mparedtothefiscalyearendedSeptember30,2018isprimarilyattributedtoadecreaseinconsultingrelatedexpenses.Selling,General and AdministrativeThefollowingtabledetailsourselling,generalandadministrative(“SG&A”)expensesbyoperatingsegmentfortheyearsendedSeptember30,2019and2018:For the year ended September 30
252、,%of%of$Increase%Increase 2019 Total 2018 Total (Decrease)(Decrease)(Dollar amounts in thousands)By Operating Segment:TSsegment$11,630 72%$11,086 66%$544 5%HPPsegment 4,422 28%5,637 34%(1,215)(22)%Total$16,052 100%$16,723 100%$(671)(4)%Forfiscalyear2019comparedtofiscalyear2018,theTSsegmentSG&Aspendi
253、ngincreaseofapproximately$0.5millionissubstantiallytheresultofanincreaseinourU.S.divisionof$1.2millionprimarilyattributedtovariablesellingexpensesandadditionalengineeringandsaleshires.Thiswaspartiallyoffsetbya$0.7milliondecreaseintheU.K.divisionattributedtoreductioninstaffandvariablecompensationexpe
254、nse.Forfiscalyear2019comparedtofiscalyear2018,theHPPsegmentSG&Aspendingdecreaseof$1.2millionisprimarilyattributedtodecreasesinexpensesrelatedtothesaleofourGermanoperations,auditexpenses,andvariablecompensation.Other Income/ExpensesThefollowingtabledetailsourotherincome/expensesfortheyearsendedSeptem
255、ber30,2019and2018:For the year ended IncreaseSeptember 30,2019September 30,2018(Decrease)(Amounts in thousands)Interestexpense$(99)$(85)$(14)Interestincome 323 20 303 Foreignexchangegain(loss)157 263 (106)Otherincome,net 3 297 (294)Totalotherincome(expense),net$384$495$(111)Thedecreasetootherincome(
256、expenses)forthefiscalyearendedSeptember30,2019ascomparedtothefiscalyearendedSeptember30,2018wasprimarilydrivenbyadecreaseinOtherincome,netof$0.3millionandadecreaseof$0.1millionforeignexchangegain(loss),partiallyoffsetbyanincreaseof$0.3millionininterestincome.Income TaxesTheCompanyrecordedanincometax
257、benefitofapproximately$71thousand,whichreflectedaneffectivetaxrateof16.1%fortheyearendedSeptember30,2019.ThetaxbenefitincludesanincreaseinthevaluationallowancefornetoperatinglossesforstateincometaxrelatedintheHighPerformanceProductssegmentwherewealsohadareversaloftheuncertaintaxpositionof$54thousand
258、asthatthestatuteoflimitationshaveexpired.FortheyearendedSeptember30,2018,theincometaxexpensewasapproximately$882thousand,whichreflectedaneffectivetaxrateof(79.7%).TheimpactoftheTaxReformAct,whichwasrecordedinfiscalyear2018,includedremeasurementoftheCompanysUSdeferredtaxassetsandliabilitiestoa24.3%fo
259、rcurrentand21%forthenon-currentportionsresultedin24TableofContentsataxexpenseofapproximately$588thousandconsistingofareductionoftheCompanysnetdeferredtaxasset.TheCompanyrecordedtaxexpenseofapproximately$771thousandrelatedtothedeemedrepatriation.AsofSeptember30,2019,managementassessedthepositiveandne
260、gativeevidenceintheU.S.operations,andestimatedthatwewillhavesufficientfuturetaxableincometoutilizetheexistingdeferredtaxassets.Significantobjectivepositiveevidenceincludedthecumulativeprofitsthatwerealizedinrecentfiscalyears.Thisevidenceenhancesourabilitytoconsiderothersubjectiveevidencesuchasourpro
261、jectionsforfuturegrowth.Otherfactorsthatweconsideredarethelikelihoodforcontinuedroyaltyincomeinfutureyears,newproductrevenuefromcybersecurityproducts,andourexpectationthattheTSsegmentwillcontinuetobeprofitableinfutureyears.Onthebasisofthisevaluation,asofSeptember30,2019,wehaveconcludedthatourU.S.def
262、erredincometaxassetrelatedtonetoperatinglossescarryforwardfortheHighPerformanceProductssegmentismorelikelythannottoberealizedexceptforcertainstatenetoperatinglosscarryforwardsandtaxcreditcarryforwards.Werecordeda$235thousandvaluationallowanceforcertainstate-relatedassetsthatarenotlikelytoberealized.
263、Itshouldbenotedhowever,thattheamountofthedeferredtaxassetnottoberealizedcouldbeadjustedinfutureyears,ifestimatesoftaxableincomeduringthecarryforwardperiodsareincreased,orifthereisobjectivepositiveevidenceintheformofcumulativeearnings.WealsocontinuetomaintainafullvaluationallowanceagainstourU.K.defer
264、redtaxassetsaswehaveexperiencedcumulativelossesanddonothaveanyindicationthattheoperationwillbeprofitableinthefuturetoanextentthatwillallowustoutilizemuchofournetoperatinglosscarryforwards.Totheextentthatactualexperiencedeviatesfromourassumptions,ourprojectionswouldbeaffectedandhenceourassessmentofre
265、alizabilityofourdeferredtaxassetsmaychange.Results of Discontinued OperationsCSPiLTD,awhollyownedindirectsubsidiaryoftheCompany,soldalloftheoutstandingstockofModcompGmbHtoReplyAG,anaffiliateofReplySpA,aholdingcompanyforaworldwidegroupofcompanies,onJuly31,2018for$14.4millioncash,andrecognizedagainof$
266、16.8million.ThedivestitureofCSPisGermanoperationsandourincreasedcashpositionwillenableustofocustimeandresourcesonourhigher-marginandgreater-potentialgrowthopportunities.WeareencouragedbythetractionofourmanagedservicesbusinessintheU.S.andweintendtocontinuetoinvestandfocusonournewARIASDScybersecurityp
267、roductsandtocapitalizeontheproliferationofourwirelessservicebusiness.ThisdivestitureofourGermanoperationsisanotherpositivesteptowardourfuturegrowth.ThefollowingtableisasummaryoftheoperatingresultsoftheGermanydivisionofourTSsegmentwhichhavebeenreflectedasdiscontinuedoperations.SeeNote2foradditionalin
268、formation.For the year ended September 30,2019September 30,2018(Amounts in thousands)Revenues$18,365Netlossfromdiscontinuedoperations,netoftax$(410)Liquidity and Capital ResourcesOurprimarysourceofliquidityisourcashandcashequivalents,whichdecreasedbyapproximately$7millionto$18.1millionasofSeptember3
269、0,2019from$25.1millionasofSeptember30,2018.SignificantsourcesofcashfortheyearendedSeptember30,2019includedanincreaseinaccountspayableandaccruedexpensesofapproximately$6.4million,proceedsfromdebtofapproximately$1.0million,andadecreaseinrefundableincometaxesofapproximately$0.6million.Morethanoffsettin
270、gthesesignificantsourcesofcashwereanincreaseinlongtermreceivablesofapproximately$5.3million,anincreaseinotherassetsanddeferredcostsofapproximately$3.1million,anincreaseinaccountsreceivableofapproximately$2.1million,andpaymentofdividendsofapproximately$2.5million.25TableofContentsCashheldbyourforeign
271、subsidiaryintheUnitedKingdomtotaledapproximately$9.1millionasofSeptember30,2019,whichconsistsof3.1millioneuros,0.2millionBritishPounds,and5.9millionU.S.Dollars.Thiscashisincludedinourtotalcashandcashequivalentsreportedabove.AsofSeptember30,2018,theCompanymaintainedalineofcreditthatallowsforborrowing
272、sofupto$1.0million.Availabilityunderthefacilitywasreducedbyoutstandingborrowingsthereunder.TheinterestratesonoutstandingborrowingswasLondonInter-BankOfferRate(LIBOR)plus2.5%,withafloorof4%.Borrowingsunderthecreditagreementsarerequiredtoberepaidondemandincertaincircumstances,uponterminationoftheagree
273、ments,ormaybeprepaidbytheCompanywithoutpenalty.TheCompanyhadnoamountsoutstandingunderthelineofcreditatSeptember30,2018.Thislineofcreditclosedduringfiscalyear2019.AsofSeptember30,2019andSeptember30,2018,theCompanyalsomaintainedaninventorylineofcreditthatmaybeusedbytheTSsegmentintheU.S.topurchaseinven
274、toryfromapprovedvendorswithpaymenttermswhichexceedthoseofferedbythevendors.Infiscalyear2019,HPPgainedaccesstothisinventorylineofcredit,butdidnotuseit.Nointerestaccruesundertheinventorylineofcreditwhenadvancesarepaidwithinterms,however,latepaymentsaresubjecttoaninterestchargeofPrimeplus5%.Thecreditag
275、reementfortheinventorylineofcreditcontainsfinancialcovenantswhichrequiretheCompanytomaintainthefollowingTSsegment-specificfinancialratios:(1)aminimumcurrentratioof1.2,(2)tangiblenetworthofnolessthan$4.0million,and(3)amaximumratiooftotalliabilitiestototalnetworthoflessthan5.0:1.AsofSeptember30,2019an
276、dSeptember30,2018,Companyborrowingsundertheinventorylineofcreditwere$2.5millionand$3.2million,respectively,andtheCompanywasincompliancewithallcovenants.Formoreinformation,pleaserefertoNote16-LinesofCredit,intheNotestoourConsolidatedFinancialStatementscontainedinthisannualreportonForm10K.Ifcashgenera
277、tedfromoperationsisinsufficienttosatisfyworkingcapitalrequirements,wemayneedtoaccessfundsthroughbankloans,theequitymarkets,orothermeans.Thereisnoassurancethatwewillbeabletoraiseanysuchcapitalontermsacceptabletous,onatimelybasisoratall.Ifweareunabletosecureadditionalfinancing,wemaynotbeabletocomplete
278、developmentorenhancementofproducts,takeadvantageoffutureopportunities,respondtocompetitionorcontinuetoeffectivelyoperateourbusiness.Basedonourcurrentplansandbusinessconditions,managementbelievesthattheCompanysavailablecashandcashequivalents,thecashgeneratedfromoperationsandavailabilityonourlinesofcr
279、editwillbesufficienttoprovidefortheCompanysworkingcapitalandcapitalexpenditurerequirementsfortheforeseeablefuture.Critical Accounting PoliciesOurdiscussionandanalysisofourfinancialconditionandresultsofoperationsarebaseduponourconsolidatedfinancialstatements,whichhavebeenpreparedinaccordancewithaccou
280、ntingprinciplesgenerallyacceptedintheUnitedStates.Thepreparationofthesefinancialstatementsrequiresustomakeestimatesandjudgmentsthataffectthereportedamountsofassets,liabilities,revenuesandexpenses.Onanon-goingbasis,weevaluateourestimates,includingthoserelatedtouncollectiblereceivables,inventoryvaluat
281、ion,goodwillandintangibles,incometaxes,deferredcompensation,revenuerecognition,retirementplans,restructuringcostsandcontingencies.Webaseourestimatesonhistoricalperformanceandonvariousotherassumptionsthatarebelievedtobereasonableunderthecircumstances,theresultsofwhichformthebasisformakingjudgmentsabo
282、utthecarryingvaluesofassetsandliabilitiesthatarenotreadilyapparentfromothersources.Actualresultsmaydifferfromtheseestimatesunderdifferentassumptionsorconditions.Webelievethefollowingcriticalaccountingpoliciesaffectourmoresignificantjudgmentsandestimatesusedinthepreparationofourconsolidatedfinancials
283、tatements:revenuerecognition;valuationallowances,specificallytheallowancefordoubtfulaccountsandnetdeferredtaxassetvaluationallowance;inventoryvaluation;intangibles;andpensionandretirementplans.26TableofContentsRevenue RecognitionEffectiveOctober1,2018,theCompanyadoptedAccountingStandardsUpdate(“ASU”
284、)No.201409,Revenue fromContracts with Customers,whichrequiresanentitytorecognizetheamountofrevenuetowhichitexpectstobeentitledforthetransferofpromisedgoodsorservicestocustomers.SeeNote1SummaryofSignificantAccountingPoliciesforeffectsofinitialadoption.Thefollowingreflectstheaccountingpolicychangeforr
285、evenuestartingonthedateofadoption:Wederiverevenuefromthesaleofintegratedhardwareandsoftware,third-partyservicecontracts,professionalservices,managedservices,financingofhardwareandsoftware,andotherservices.Werecognizerevenuefromhardwareupontransferofcontrol,whichisatapointintimetypicallyuponshipmentw
286、hentitletransfers.Revenuefromsoftwareisrecognizedatapointintimewhenthelicenseisgranted.Werecognizerevenuefromthird-partyservicecontractsaseithergrosssalesornetsalesdependingonwhethertheCompanyisactingasaprincipalpartytothetransactionorsimplyactingasanagentorbrokerbasedoncontrolandtiming.TheCompanyis
287、aprincipalifitcontrolsthegoodorservicebeforethatgoodorserviceistransferredtothecustomer.WerecordrevenueasgrosswhentheCompanyisaprincipalpartytothearrangementandnetofcostwhenweareactingasabrokeroragent.Undergrosssalesrecognition,theentiresellingpriceisrecordedinrevenueandourcosttothethird-partyservic
288、eproviderorvendorisrecordedincostofgoodssold.Undernetsalesrecognition,thecosttothethird-partyserviceproviderorvendorisrecordedasareductiontorevenueresultinginnetsalesequaltothegrossprofitonthetransaction.Third-partyservicecontractsaresoldindifferentcombinationswithhardware,software,andservices.Wehav
289、edeterminedthethird-partyservicescontractsareasingleperformanceobligationineachsale.WhentheCompanyisanagent,revenueistypicallyrecordedatapointintime.WhentheCompanyistheprincipal,revenueisrecognizedoverthecontractterm.Professionalservicesgenerallyincludeimplementation,installation,andtrainingservices
290、.Professionalservicesareconsideredaseriesofdistinctservicesthatformoneperformanceobligationandrevenueisrecognizedovertimeasservicesareperformed.Revenuegeneratedfrommanagedservicesisrecognizedoverthetermofthecontract.Certainmanagedservicescontractsincludefinancingofhardwareandsoftware.Revenuesfromarr
291、angementswhichincludefinancingareallocatedconsideringrelativestandalonesellingpricesofleaseandnon-leasecomponentswithintheagreement.Theleasecomponentsincludethehardwareandsoftware,whicharesubjecttoASC840.Thenon-leasecomponentincludesthemanagedservicesandissubjecttoASC606.Otherservicesgenerallyinclud
292、erevenuegeneratedthroughourroyalty,extendedwarranty,multicomputerrepair,andmaintenancecontracts.Royaltyrevenueissales-basedandrecognizedondateofsubsequentsaleoftheproduct,whichoccursonthedateofcustomershipment.Revenuefromextendedwarrantycontractsisrecognizedevenlyovertheperiodofthewarranty.Multicomp
293、uterrepairservicesrevenueisrecognizeduponcontroltransferwhenthecustomertakespossessionofthecomputerattimeofshipping.Revenuegeneratedfrommaintenanceservicesisrecognizedevenlyoverthetermofthecontract.Variableconsiderationisimmaterial.Anyproductssoldwithrighttoreturnexistswiththemanufacturer.Managedser
294、vicecontractscontaintherighttorefundifcanceledwithin30daysofinception.AnyproductswithastandardwarrantyaretreatedasawarrantyobligationunderASC460,Guarantees.Thefollowingpoliciesareapplicabletoourmajorcategoriesofsegmentrevenuetransactions:TS Segment RevenueTSSegmentrevenueisderivedfromthesaleofhardwa
295、re,software,professionalservices,third-partyservicecontracts,maintenancecontracts,managedservices,andfinancingofhardwareandsoftware.Financingrevenueis27TableofContentsrecognizedinaccordancewithASC840,Leases.FinancingrevenueisrecordedinrevenueasequipmentleasingandispartoftheCompanysoperations.Third-p
296、artyservicecontractsareevaluatedtodeterminewhethersuchservicerevenueshouldberecordedasgrosssalesornetandwhetherovertimeoratpointintime.HPP Segment RevenueHPPsegmentrevenueisderivedfromthesaleofintegratedhardwareandsoftware,maintenance,andotherservicesthroughtheMulticomputerandMyricomproductlines.Myr
297、icomrevenueisderivedfromthesaleofproducts,whicharecomprisedofbothhardwareandembeddedsoftwarewhichisessentialtotheproductsfunctionality,andpostcontractmaintenanceandsupport.Postcontractmaintenanceandsupportisconsideredimmaterialinthecontextofthecontractandthereforeisnotaseparateperformanceobligation.
298、Significant JudgmentsTheinputmethodusinglaborhoursexpendedrelativetothetotalexpectedhoursisusedtorecognizerevenueforprofessionalservices.OnlythehoursthatdepicttheCompanysperformancetowardsatisfyingaperformanceobligationareusedforprogress.Anestimateforprofessionalservicesismadeatthebeginningofeachcon
299、tractbasedonpriorexperienceandmonitoredthroughouttheservices.Thismethodismostappropriateasitdepictsthemeasureofprogresstowardssatisfactionoftheperformanceobligation.Whenproductandservicesaresoldtogether,theallocationofthetransactionpricetoeachperformanceobligationiscalculatedusingabudgetedcost-plusm
300、arginapproach.Duetothecomplexnatureofthesecontracts,thereissignificantjudgmentinallocatingthetransactionprice.Theseestimatesareperiodicallyreviewedbyprojectmanagers,engineers,andotherstaffinvolvedtoensureestimatesareappropriate.Foritemssoldseparately,includinghardware,software,professionalservices,m
301、aintenancecontracts,otherservices,andthird-partyservicecontracts,thereisnoallocationperformedasthereisoneperformanceobligation.Contract Assets and LiabilitiesWhentheCompanyhasperformedworkbutdoesnothaveanunconditionalrighttopayment,acontractassetisrecorded.WhentheCompanyhastherighttobillacustomer,ac
302、countsreceivableisrecordedasanunconditionalrightexists.ContractliabilitiesarisewhenpaymentisreceivedbeforetheCompanytransfersagoodorservicetothecustomer.Contract CostsIncrementalcostsofobtainingacontractinvolvingcustomertransactionswheretherevenueandtherelatedtransferofgoodsandservicesarelessthanaon
303、e-yearperiod,areexpensedasincurred,utilizingthepracticalexpedientinASC34040254.Foraperiodgreaterthanoneyear,incrementalcontractcostsarecapitalizediftheCompanyexpectstorecoverthesecosts.Thesecostsareonlycapitalizedifthecontractisobtained.Thecostsareamortizedoverthecontracttermandexpectedrenewalperiod
304、s.Theperiodofamortizationisgenerallythreetosixyears.IncrementalcostsarerelatedtocommissionsintheTSportionofthebusiness.Coststofulfillacontractarecapitalizedwhenthecostsarerelatedtoacontractoranticipatedcontract,generateorenhanceresourcesthatwillbeusedinsatisfyingperformanceobligationsinthefuture,and
305、costsarerecoverable.CoststofulfillacontractarerelatedtotheTSportionofthebusinessandinvolveactivitiesperformedbeforemanagedservicescanbecompleted.Currentcapitalizedfulfillmentcostsareintheaccountothercurrentassetsontheconsolidatedbalancesheets.28TableofContentsOtherProjectsaretypicallybilleduponcompl
306、etionoratcertainmilestones.Productandservicesaretypicallybilledwhenshippedorasservicesarebeingperformed.Paymenttermsaretypically30daystopayinfullexceptinEuropewhereitcouldbeupto90days.Therearecertaincontractsthatdocontainafinancingcomponent.SeeNote3fordetails.MostoftheCompanyscontractsarelessthanone
307、year.Asapracticalexpedient,theCompanyhaselectednottoadjusttheamountofconsiderationforeffectsofasignificantfinancingcomponentwhenitisanticipatedthepromisedgoodorservicewillbetransferredandthesubsequentpaymentwillbeoneyearorless.TheCompanyelectedtousetheoptionalexemptiontonotdisclosetheaggregateamount
308、ofthetransactionpriceallocatedtoperformanceobligationsthathaveanoriginalexpecteddurationofoneyearorless.Thisisduetoalowamountofperformanceobligationslessthanoneyearbeingunsatisfiedateachperiodend.Mostofthesecontractsarerelatedtoproductsales.TheCompanyhascertaincontractsthathaveanoriginaltermofmoreth
309、anoneyear.Theroyaltyagreementislongerthanoneyearandmanagedservicecontractsaregenerallylongerthanoneyear.Product Warranty AccrualOurproductsalesgenerallyincludea90daytothree-yearhardwarewarranty.Attimeofproductshipment,weaccruefortheestimatedcosttorepairorreplacepotentiallydefectiveproducts.Estimated
310、warrantycostsarebaseduponprioractualwarrantycostsforsubstantiallysimilarproducts.Engineering and Development ExpensesEngineeringanddevelopmentexpensesincludepayroll,employeebenefits,stock-basedcompensationandotherheadcount-relatedexpensesassociatedwithproductdevelopment.Engineeringanddevelopmentexpe
311、nsesalsoincludethird-partydevelopmentandprogrammingcosts.Weconsidertechnologicalfeasibilityforoursoftwareproductstobereacheduponthereleaseofthesoftware,accordingly,nointernalsoftwaredevelopmentcostshavebeencapitalized.Income TaxesWeusetheassetandliabilitymethodofaccountingforincometaxeswherebydeferr
312、edtaxassetsandliabilitiesarerecognizedfortheestimatedfuturetaxconsequencesattributabletodifferencesbetweenthefinancialstatementcarryingamountsofexistingassetsandliabilitiesandtheirrespectivetaxbases.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesineffectfortheyearinwhichthosetemporary
313、differencesareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate.Wealsoreducedeferredtaxassetsbyavaluationallowanceif,basedontheweightofavailableevidence,itismorelikelythannotthatsomeportionorallofth
314、erecordeddeferredtaxassetswillnotberealizedinfutureperiods.Thismethodologyrequiresestimatesandjudgmentsinthedeterminationoftherecoverabilityofdeferredtaxassetsandinthecalculationofcertaintaxliabilities.Valuationallowancesarerecordedagainstthegrossdeferredtaxassetsthatmanagementbelieves,afterconsider
315、ingallavailablepositiveandnegativeobjectiveevidence,historicalandprospective,withgreaterweightgiventohistoricalevidence,thatitismorelikelythannotthattheseassetswillnotberealized.Inaddition,wearerequiredtorecognizeintheconsolidatedfinancialstatements,thosetaxpositionsdeterminedtobemore-likely-than-no
316、tofbeingsustaineduponexamination,basedonthetechnicalmeritsofthepositionsasofthereportingdate.Ifataxpositionisnotconsideredmore-likely-than-nottobesustainedbasedsolelyonitstechnicalmerits,nobenefitsofthepositionarerecognized.Inaddition,thecalculationoftheCompanystaxliabilitiesinvolvesdealingwithuncer
317、taintiesintheapplicationofcomplextaxregulationsinamultitudeofjurisdictions.TheCompanyrecordsliabilitiesforestimatedtaxobligationsintheU.S.andothertaxjurisdictions.Theseestimatedtaxliabilitiesincludetheprovisionfortaxesthatmaybecomepayableinthefuture.29TableofContentsIntangible AssetsIntangibleassets
318、thatarenotsubjecttoamortizationarealsorequiredtobetestedannually,ormorefrequentlyifeventsorcircumstancesindicatethattheassetmaybeimpaired.WedidnothaveintangibleassetswithindefinitelivesatanytimeduringthetwoyearsendedSeptember30,2019.Intangibleassetssubjecttoamortizationareamortizedovertheirestimated
319、usefullives,generallythreetotenyears,andarecarriedatnetbookvalue.Theremainingusefullivesofintangibleassetsareevaluatedonanannualbasis.Intangibleassetssubjecttoamortizationarealsotestedforrecoverabilitywhenevereventsorchangesincircumstancesindicatethattheircarryingamountmaynotberecoverable.Ifthefairv
320、alueofanintangibleassetsubjecttoamortizationisdeterminedtobelessthanitscarryingvalue,thenanimpairmentchargeisrecordedtowritedownthatassettoitsfairvalue.InventoriesInventoriesarestatedatthelowerofcostormarket,withcostdeterminedusingthefirst-in,first-outmethod.Therecoverabilityofinventoriesisbasedupon
321、thetypesandlevelsofinventoriesheld,forecasteddemand,pricing,competitionandchangesintechnology.Wewritedownourinventoryforestimatedobsolescenceorunmarketableinventoryequaltothedifferencebetweenthecostofinventoryandtheestimatedmarketvaluebaseduponassumptionsaboutfuturedemandandmarketconditions.Ifactual
322、marketconditionsarelessfavorablethanthoseprojectedbymanagement,additionalinventorywrite-downsmayberequired.Pension and Retirement PlansThefundedstatusofpensionandotherpost-retirementbenefitplansisrecognizedprospectivelyontheconsolidatedbalancesheet.Gainsandlosses,priorservicecostsandcreditsandanyrem
323、ainingtransitionamountsthathavenotyetbeenrecognizedthroughpensionexpensewillberecognizedinaccumulatedothercomprehensiveincome,netoftax,untiltheyareamortizedasacomponentofnetperiodicpension/post-retirementbenefitsexpense.Additionally,planassetsandobligationsaremeasuredasofourfiscalyear-endbalanceshee
324、tdate(September30).WehavedefinedbenefitanddefinedcontributionplansintheU.K.andintheU.S.IntheU.K.,theCompanyprovidesdefinedbenefitpensionplansforcertainemployeesandformeremployeesanddefinedcontributionplansforthemajorityoftheemployees.ThedefinedbenefitplansintheU.K.areclosedtonewlyhiredemployeesandha
325、vebeenforthetwoyearsendedSeptember30,2019.IntheU.S.,theCompanyprovidesdefinedcontributionplansthatcovermostemployeesandsupplementaryretirementplanstocertainemployeesandformeremployeeswhoarenowretired.ThesesupplementaryretirementplansarealsoclosedtonewlyhiredemployeesandhavebeenforthetwoyearsendedSep
326、tember30,2019.Thesesupplementaryplansarefundedthroughwholelifeinsurancepolicies.TheCompanyexpectstorecoverallinsurancepremiumspaidunderthesepoliciesinthefuture,throughthecashsurrendervalueofthepoliciesandanydeathbenefitsorportionsthereoftobepaiduponthedeathoftheparticipant.Thesewholelifeinsurancepol
327、iciesarecarriedonthebalancesheetattheircashsurrendervaluesastheyareownedbytheCompanyandnotassetsofthedefinedbenefitplans.IntheU.S.,theCompanyalsoprovidesforofficerdeathbenefitsandpost-retirementhealthinsurancebenefitsthroughsupplementalpost-retirementplanstocertainofficers.TheCompanyalsofundsthesesu
328、pplementalplansobligationsthroughwholelifeinsurancepoliciesontheofficers.Pensionexpenseisbasedonanactuarialcomputationofcurrentfuturebenefitsusingestimatesforexpectedreturnonassets,expectedcompensationincreasesandapplicablediscountrates.Managementhasreviewedthediscountratesandratesofreturnwithourcon
329、sultingactuariesandinvestmentadvisersandconcludedtheywerereasonable.Adecreaseintheexpectedreturnonpensionassetswouldincreasepensionexpense.Expectedcompensationincreasesareestimatedbasedonhistoricalandexpectedincreasesinthefuture.Increasesinestimatedcompensationincreaseswouldresultinhigherpensionexpe
330、nsewhiledecreaseswouldlowerpensionexpense.Discountratesareselectedbaseduponratesofreturnonhighqualityfixedincomeinvestmentscurrentlyavailableandexpectedtobeavailableduringtheperiodtomaturityofthepensionbenefit.Adecreaseinthediscountratewouldresultingreaterpensionexpensewhileanincreaseinthediscountra
331、tewoulddecreasepensionexpense.30TableofContentsTheCompanyfundsitspensionplansinamountssufficienttomeettherequirementssetforthinapplicableemployeebenefitslawsandlocaltaxlaws.Liabilitiesforamountsinexcessofthesefundinglevelsareaccruedandreportedintheconsolidatedbalancesheets.Inflation and Changing Pri
332、cesManagementdoesnotbelievethatinflationandchangingpriceshadsignificantimpactonsales,revenuesorincomeduringfiscalyears2019or2018.ThereisnoassurancethattheCompanysbusinesswillnotbemateriallyandadverselyaffectedbyinflationandchangingpricesinthefuture.Item 8.Financial Statements and Supplementary DataT
333、heconsolidatedfinancialstatementsareincludedherein.PageReportofIndependentRegisteredPublicAccountingFirm38ConsolidatedBalanceSheetsasofSeptember30,2019and201839ConsolidatedStatementsofOperationsfortheyearsendedSeptember30,2019and201840ConsolidatedStatementsofComprehensiveIncomefortheyearsendedSeptember30,2019and201841ConsolidatedStatementsofShareholdersEquityfortheyearsendedSeptember30,2019and2018
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