1、Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934For the Fiscal Year Ended September 30,2021.TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT O
2、F 1934For the transition period from toCommission File Number 000-10843CSP Inc.(Exact name of Registrant as specified in its Charter)Massachusetts 04-2441294(State of incorporation)(I.R.S.Employer Identification No.)175 Cabot Street,Lowell,Massachusetts 01854(Address of principal executive offices)(
3、978)954-5038(Registrants telephone number including area code)Securities Registered Pursuant to Section 12(b)of the Act:Securities registered pursuant to Section 12(g)of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.
4、Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.Yes No Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during thep
5、receding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes No .Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be s
6、ubmitted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit such files).Yes No .Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accel
7、erated filer,a smaller reporting company,or an emerging growthcompany.See the definitions of“large accelerated filer”,“accelerated filer”,“smaller reporting company”,and emerging growth company in Rule 12b-2 of the Exchange Act.Large accelerated filer Accelerated filer Non-accelerated filer Smaller
8、Reporting Company Emerging Growth Company If an emerging growth company,indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a)of the Exchange Act.Indicate by
9、 check mark whether the registrant has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financialreporting under Section 404(b)of the Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued i
10、ts audit report.Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).Yes No The aggregate market value of the registrants common stock held by non-affiliates of the registrant was$33,233,374,based on the closing sale price of$8.70 as reported
11、on the Nasdaq Global Market on March 31,2021.As of December 8,2021,we had outstanding 4,394,460 shares of common stock.DOCUMENTS INCORPORATED BY REFERENCECertain portions of the information required in Part III of this Form 10-K are incorporated by reference from our definitive proxy statement for o
12、ur 2022 annual meeting ofstockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30,2021.Title of Each Class Trading Symbol(s)Name of each exchange on which registeredCommon Stock,par value$0.01 per shareCSPINasdaq Global
13、MarketTable of ContentsTable of ContentsiTABLE OF CONTENTSPagePART I.Item 1.Business2Item 1A.Risk Factors8Item 2.Properties17Item 3.Legal Proceedings17Item 4.Mine Safety Disclosures17PART II.Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of EquitySecurit
14、ies17Item 6.Reserved18Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations18Item 8.Financial Statements and Supplementary Data29Item 9.Change in and Disagreements with Accountants on Accounting and Financial Disclosures30Item 9A.Controls and Procedures30Item 9B
15、.Other Information31Item 9C.Disclosure Regarding Foreign Jurisdiction that Prevent Inspections31PART III.Item 10.Directors,Executive Officers and Corporate Governance31Item 11.Executive Compensation32Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matte
16、rs32Item 13.Certain Relationships and Related Transactions and Director Independence32Item 14.Principal Accountant Fees and Services33PART IV.Item 15.Exhibits and Financial Statement Schedules33Item 16.Form 10-K Summary34Note:Items 1B and 7A are not required for Smaller Reporting Companies and there
17、fore are not furnished.Table of Contents1Special Note Regarding Forward-Looking StatementsThis annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933,as amended,and Section 21E of the Securities Exchange Act of 1934,as amended.Th
18、is information may involveknown 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 statement
19、s.The discussion 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 statements inwhich we use words such as“expect,”“believe,”“anticipate,”“intend,”“estimate,”“sh
20、ould,”“could,”“may,”“plan,”“potential,”“predict,”“project,”“will,”“would”and similar expressions.Although we believe the expectations reflected in suchforward-looking statements are based on reasonable assumptions,the forward-looking statements are subject to significant risksand uncertainties,and t
21、hus we cannot assure you that these expectations will prove to be correct,and actual results may vary fromthose contained in such forward-looking statements.We discuss many of these risks and uncertainties in Item 1A under the heading“Risk Factors”in this Annual Report.Factors that may cause such va
22、riances include,but are not limited to,our dependence on a small number of customers fora significant portion of our revenue,our dependence on contracts with the U.S.federal government,our reliance in certaincircumstances on single sources for supply of key product components,and intense competition
23、 in the market segments in which weoperate.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 the forward-looking statements inclu
24、ded in this Annual Report on Form 10-K on information available to us on the date of this Annual Report,and we assume no obligation to update any such forward-looking statements,other than as required by law.Table of Contents2PART IItem 1.BusinessCSP Inc.(CSPi or CSPI or the Company or we or our)was
25、 incorporated in 1968 and is based in Lowell,Massachusetts.To meet the diverse requirements of our commercial and defense customers worldwide,CSPi and its subsidiariesdevelop and market IT integration solutions,advanced security products,managed IT services,cloud services,purpose builtnetwork adapte
26、rs,and high-performance cluster computer systems.SegmentsCSPI operates in two segments:Technology Solutions(TS)and High Performance Products(HPP).TS SegmentThe TS segment consists of our wholly-owned Modcomp subsidiary,which operates in the United States and the UnitedKingdom.The TS segment generate
27、s product revenues by reselling third-party computer hardware and software as a value addedreseller(VAR).The TS segment generates service revenues by the delivery of professional services for complex ITsolutions,including advanced security;unified communications and collaboration;wireless and mobili
28、ty;data centersolutions;and network solutions as well as managed IT services(MSP)that primarily serve the small and mid-sizedbusiness market(SMB).Third party products and professional services are marketed and sold through the Companys direct sales force into avariety of vertical markets,including;a
29、utomotive;defense;health care;education;federal,state and local government;and maritime.CSPi sold all stock of Modcomp GmbH to Reply AG on July 31,2018 for$14.4 million cash and a gain of$18.1 million.This sale was recorded in fiscal year 2018.An additional 400 thousand was included in escrow as par
30、t of the SharePurchase and Assignment Agreement to potentially be received later as a purchase price adjustment in fiscal year 2021.This amount was received in July 2021 and recorded as a gain from discontinued operations in the ConsolidatedStatements of Operations.No income taxes were provided as t
31、he transaction was a tax-free exchange in the U.K.Thereare no other amounts that will be received as part of the agreement.HPP SegmentThe HPP segment revenue comes from three distinct product lines:(i)a cybersecurity solution marketed as ARIASoftware-Defined Security(“SDS”),which is offered to comme
32、rcial,original equipment manufacturers(OEM)andgovernment customers;(ii)the Myricom network adapters for commercial,government and OEM customers;and(iii)the legacy Multicomputer product portfolio for digital signal processing(DSP)applications within the defense markets.The ARIA SDS solution is a soft
33、ware portfolio starting with an underlying platform,and hosted applications that reside on top,as well as supporting hardware then deployed in turn-key security deployments.All are developed to secure an organizations network,enterprise-wide,to better protect critical devices,applications and high-v
34、alue data,such as personally identifiable information(PII),from breaches.Revenue is derived from:(i)license sales of our software platform components,(ii)supporting hardware and(iii)any required support packages.The software licenses,as well as the support packages,are renewable on a recurring basis
35、.The ARIA SDS platform and applications can also be deployed on our Myricom SmartNIC adapters which can be directly inserted into our customers servers or integrated as part of our turn-key appliances.Either of these approaches can be deployed into a customers data center environments or on-premise
36、servers to provide network security services.Table of Contents3The ARIA portfolio is of value to regulated industries,such as financial services or healthcare,due to the rise of data-privacy regulations enforced at the federal,U.S.state,and international level,as well as industry entities.Due to the
37、 COVID-19 pandemic and the dramatic increase in remote workforce,we believe ARIA SDS will provide additional protection against exploits entering in from home-based computers and networks.In addition,due to the complexities and high-costs associated with enterprise-wide security,particularly in the
38、creation and operation of Security Operation Centers(“SOCs”),we believe that ARIA will be attractive to organizations that desire SOC level protections without incurring the procurement of disparate tools and the need to hire and retain highly-trained security analysts.We also believe the unique,pat
39、ent-pending approach will be attractive to Managed Security Service Providers(“MSSPs”)and OEMs that pursue differentiated security services for their customers.While our initial offerings of the ARIA SDS portfolio are available now,we expect the number of offerings will continue to expand over time.
40、There was limited revenue for ARIA SDS in fiscal 2021.This was primarily due to COVID-19 limiting our ability toaccess prospects data centers for trials and deployments;however,our customer pipeline recovered in the second half ofFY 2021.As such,we saw an increase in recorded revenue from ARIA SDS d
41、uring the second half of FY 2021.The Myricom SmartNIC adapters(“ARC Series”and Myricom Secure Intelligent Adapters or“SIA”)are optimized for and sold into markets that require high-bandwidth and low-latency including(i)packet capture,(ii)financial transactions,(iii)machine vision and(iv)network secu
42、rity.Our primary customers for packet capture include government agencies that need to capture,inject,and analyze network traffic at line rate,and OEMs selling into vendors of computer security appliances.Financial institutions,such as banks,and brokerage firms use Myricom adapters to decrease trans
43、action times.Our machine vision customers,primarily in the manufacturing industry,use our adapters and software for high fidelity video capture and processing.Organizations across all verticals can benefit from the network monitoring software that allows threats to be found within network data at wi
44、re rate on our SmartNICs.Multicomputer products for DSP applications are no longer actively developed but will continue to be sold intoestablished programs and supported for several years.Revenue flows come from servicing previously deployed productsfor a modest number of existing high-value defense
45、 customers.Therefore,the revenue from these products,as apercentage of overall Company revenue,is expected to decline over time.Sales Information by Industry SegmentThe following table details our sales by operating segment for fiscal years ending September 30,2021 and 2020.Additional segment and ge
46、ographical information are set forth in Note 18 Segment Information to the consolidated financialstatements.Segment 2021%2020%(Dollar amounts in thousands)TS$44,585 91%$55,917 90%HPP 4,623 9%5,876 10%Total Sales$49,208 100%$61,793 100%TS SegmentProducts and ServicesIntegration SolutionsThe TS segmen
47、t,is a value-added reseller(VAR)of third-party hardware and software technology solutions along withour,advanced technology consulting,professional IT,managed IT and Cloud services.Our value propositionTable of Contents4is our ability to support the complete IT life cycle of planning,designing,imple
48、menting and optimizing a comprehensive solutioninto our customers IT environments,to help achieve their expected business outcomes.Third-Party Hardware and SoftwareWe sell third-party hardware,software,and information technology products,with a strategic focus on industry standardservers and data ce
49、nter infrastructure solutions,midrange data storage infrastructure products,networking and mobility products,unified communications,and advanced IT security hardware and software solutions.Our key offerings include products fromHewlett Packard(HPE)/Aruba,Cisco Systems,Palo Alto Networks,Nutanix,Dell
50、EMC,Juniper Networks,Citrix,Intel,VMWare,Fortinet,Microsoft and Barracuda.Through our business relationships with these vendors,we are able to offer competitively pricedrobust products to meet our diverse customers technology needs,providing procurement and engineering expertise in serverinfrastruct
51、ure,storage,security,unified communications,mobility and networking,to the small-to-medium sized businesses(SMBs)and large enterprise businesses(LEBs)with unique and/or complex IT environments.Many of our SMB customershave unique technology needs and may lack technical purchasing expertise or have v
52、ery limited IT engineering resources on staff.We offer our customers a single point of contact for complicated multi-vendor technology purchases.We also provide installation,integration,logistical assistance and other value-added services that customers may require.We target SMB and LEB customersacr
53、oss all industries.Our current customers are in web and infrastructure hosting,education,telecommunications,healthcareservices,distribution,financial services,professional services and manufacturing.Professional ServicesWe provide professional IT consulting services in the following areas:Assessment
54、s,planning,designing,implementation,migration,optimization services and project management.Hyper-Converged Infrastructure(HCI).We assist our clients with designing and implementing HCI solutions frommultiple vendors including DellEMC,Nutanix,HPE and Cisco.HCI is a software-centric architecture that
55、tightlyintegrates compute,storage and virtualization resources in a single system.The benefits of an HCI solution are improvedperformance,scalability and flexibility all in a reduced footprint.Virtualization.We help our customers implement virtualization solutions using products from companies such
56、asVMWare,Nutanix and Citrix that allow one computer to do the job of multiple computers by sharing resources of a singlecomputer across multiple environments.Virtualization eliminates physical and geographical limitations and enables usersto host multiple operating systems and applications on fewer
57、servers.Benefits include energy cost savings,lower capitalexpenditure requirements,high availability of resources,better desktop management,increased security and improveddisaster recovery.Enterprise security intrusion prevention,network access control and unified threat management.Using third-party
58、products from companies like Palo Alto,Aruba Networks,Juniper Networks,Fortinet,Barracuda and Cisco Systems,ourservices are designed to ensure data security and integrity through the establishment of virtual private networks,firewallsand other technologies.IT security compliance services.We provide
59、services for IT security compliance with personal privacy laws such as thePayment Card Industry Data Security Standard(PCI DSS),the Health Insurance Portability and Accountability Act of1996(HIPAA),and internal control regulations under the Sarbanes-Oxley Act(SOX).Unified communications,using Cisco
60、Systems and Microsoft solutions.We are Cisco Premier Partner approved for itsCloud and Managed Services Program for Managed Business Communications and a Microsoft Gold Partner withspecialties in Cloud,and Collaboration solutions.Wireless,routing,and switching solutions using Juniper Networks and Ar
61、uba Networks products and services.Table of Contents5Custom software applications and solutions development and support.We develop custom applications to customerspecifications using industry standard platforms such as Microsoft.Net,SharePoint and OnBase.We are a Microsoft GoldPartner.Managed IT ser
62、vices that include monitoring,reporting and management of alerts for the resolution and preventivegeneral IT and IT security support tasks.Optimization,maintenance and technical support for third-party products including hardware and software,operatingsystem and user support.Managed IT and Cloud Ser
63、vicesAs consumption models continue to evolve in our industry,we have developed a robust managed and cloud servicesportfolio to provide alternative solutions to traditional capital expenditure investments in IT solutions and IT operations for ourclients.Our value is to provide an elastic offering th
64、at will allow the client to scale and consume these offerings with monthlybilling options that help control costs and provide economies of scale.We provide managed and cloud services in the following areas:Proactive monitoring and remote management of IT Infrastructure that includes network(both wir
65、ed and wireless),datacenter(which includes compute,storage and virtualization),desktops,unified communications platforms and security.Managed and Hosted Unified Communication as a Service via a Cisco Communication and Collaboration solution underan annuity program.Managed Security(firewall,endpoint
66、protection,malware,anti-virus Managed Detection&Response).Managed BackUp and Replication.Cloud services that include Microsoft 365,Azure,Azure Virtual Desktop,Greencloud,Amazon Web Services and GoogleCloud Platform.Markets and MarketingWe are an IT systems integrator and computer hardware and softwa
67、re VAR.We also provide technical services to achievea value-add to our customers.We operate within the VAR sales channels of major computer hardware and software OEMs,primarily within the geographic areas of our sales offices and across the U.S.We provide innovative IT solutions,including amyriad of
68、 infrastructure products with customized professional IT consulting services and managed services to meet the uniquerequirements of our customers.We market the products and services we sell through sales offices in the U.S.and the U.K.usingour direct sales force.CompetitionOur primary competition in
69、 the TS segment are other VARs ranging from small companies that number in the thousands,to large enterprises such as CDW,PC Connection,Insight,Presidio,Dimension Data,and Computacenter Limited.In addition,wecompete directly with many of the companies that manufacture the third-party products we sel
70、l,including Cisco Systems,IBM,HPE,EMC(now part of Dell)and others.In the network management,security and storage systems integration services business,our competitors are extensive and vary to a certain degree in each of the geographical markets,but they also include such nationalcompetitors as HP/E
71、DS,IBM and Cap Gemini.Nearly all of our product offerings are available through other channels.Favorable competitive factors for the TS segmentinclude procurement capability,product diversity which enables the delivery of complete and customTable of Contents6solutions to our customers and the streng
72、th of our key business relationships with the major IT OEMs.We also consider our abilityto meet the unique and/or specialized needs of the SMB and LEB markets and our strong knowledge of the IT products that we sellto be a key competitive advantage.Our ability to provide managed services through our
73、 network operations center and theprofessional IT services required to design and implement custom IT solutions to address our customers IT needs are distinctcompetitive advantages.Unfavorable competitive factors include low name recognition,limited geographic coverage and pricing.Sources and Availa
74、bility of ProductCOVID-19 has adversely affected the distribution channel leading to significantly longer lead times when the TS segmentorders product.Manufacturers are not producing as much product as prior to the pandemic due to disruptions,resulting in supplyshortages.Additionally,recent global s
75、hipping delays have exacerbated this problem.The TS segment has many vendors ittransacts with,and supply shortages are pervasive with many of them.BacklogThe gross backlog of customer orders and contracts for the TS segment was approximately$8.7 million atSeptember 30,2021,as compared to$4.3 million
76、 at September 30,2020.Our backlog can fluctuate greatly.These fluctuations canbe due to the timing of receiving large orders for third-party products and/or IT services.It is expected that all of the customerorders in backlog will ship and/or be provided during fiscal year 2022.HPP SegmentProducts a
77、nd ServicesThe mission of the HPP team is to deliver a differentiated,smarter approach to cybersecurity.Our software-definedplatform makes it easier for organizations to achieve enterprise-wide network security and protection of critical assets,applicationsand devices by improving their ability to f
78、ind,stop,and prevent cyberattacks.Markets and MarketingCyber Security Products MarketThe ARIA SDS solution is targeted at organizations that need to get additional functionality out of their currentcybersecurity solutions to find and stop attacks,while also reducing their operating costs.At the pres
79、ent time,our ARIA SDSsolutions are primarily offered through our direct sales channel,however,we have begun to add channel partners such asindependent resellers and MSSPs.These value added resellers will find the ARIA offerings an appealing way to expand theirportfolio of security products and servi
80、ces while replacing less-effective tools and processes in their customer environments.OEM vendors in the cybersecurity market can benefit from integrating the ARIA applications and leveraging them asinternal solutions to allow their applications to scale,add critical functionality.OEMs are intereste
81、d in the Myricom Adaptersincluding our SIA SmartNIC running our ARIA SDS applications.As mentioned,MSSPs require simple,yet differentiated,solutions that can be deployed across their customer bases.Thedetection,and automation capabilities found in ARIA SDS are valuable as they allow these security s
82、ervice providers to scale theirofferings while increasing the productivity of their security operation center staff.Aerospace&Defense MarketOur focus for fiscal 2022 and beyond is to continue our support of system deployments to be made by governmententities.Financial Transactions MarketTable of Con
83、tents7Myricom network adapters with DBL application software address the need for the ultra-low latency required in the worldof financial trading.Running DBL on the Myricom ARC Series provides acceleration for 10G Ethernet environments,withbenchmarked application-to-application latency in the single
84、 digit microsecond range for Linux and Microsoft Windows operatingsystems.Packet Capture MarketMyricom Sniffer10G software,running on Myricom ARC adapters,provides enterprise and government customers andpartners the ability to capture,inject,and analyze network traffic at line rate,with low CPU over
85、head.Machine Vision MarketMyricom ARC network adapters are used by OEMs for machine vision camera systems network applications,These OEMcustomers require the high-performance,low latency 10G attributions our solutions support.CompetitionCSPis competition in the cybersecurity space comes primarily fr
86、om the large,traditional security vendors like Splunk,IBM,and McAfee.We also face competition from traditional network security solutions vendors such as Palo Alto and Cisco.Manufacturing,Assembly and TestingCurrently,products are shipped to our customers directly from our plant in Lowell,Massachuse
87、tts.Our manufacturingactivities consist mainly of final assembly and testing of printed circuit boards and systems that are designed by us and fabricatedby outside third-party vendors.Upon our receipt of material and components from outside suppliers,our quality assurance technicians inspect thesepr
88、oducts and components.During manufacture and assembly,both sub-assemblies and completed systems are subjected toextensive testing,including burn-in and environmental stress screening designed to minimize equipment failure at delivery andover the useful service life of the system.We also use diagnost
89、ic programs to detect and isolate potential component failures.We provide a warranty covering defects arising from the sale of Multicomputer and Myricom products,which varies from90 days to three years,depending upon the particular unit in question.Sources and Availability of Raw MaterialsSeveral co
90、mponents used in our HPP segment products are obtained from sole-source suppliers.We are dependent on key vendors such as Xilinx,NXP,NVIDIA and BCRM for a variety of processors for certain products.While we face the same supply chain risks as the rest of our competitors,we continue to work closely w
91、ith our long term suppliers to meet our projected sales obligations.COVID-19 has adversely affected manufacturers,which has led to production disruptions,resulting in supply shortages.Additionally,recent global shipping delays have exacerbated this problem.Research and DevelopmentFor the year ended
92、September 30,2021,our expenses for R&D were approximately$2.9 million compared toapproximately$2.8 million for the year ended September 30,2020.Expenditures for R&D are expensed as they are incurred.Product development efforts in fiscal year 2021 and 2020 involved development of the ARIA SDS product
93、 set,and enhancementsto our Myricom products.We expect to continue to make investments related to the development of new hardware adapter productsand new cybersecurity software applications.Table of Contents8Intellectual PropertyWe rely on a combination of trademark and trade secret laws in the Unit
94、ed States and other jurisdictions,as well asconfidentiality procedures and contractual provisions to protect our intellectual property rights.We have pending patents for theARIA SDS software and will be pursuing additional patent rights over time.BacklogThe gross backlog of customer orders and contr
95、acts in the HPP segment was$4.3 million at September 30,2021 ascompared to$0.6 million at September 30,2020.Our backlog can fluctuate greatly.We can experience possible large fluctuationsdue to the timing of receipt of large orders often for purchases from prime contractors for sales to the governme
96、nt.It is expected thecustomer orders in backlog will ship and/or be provided through fiscal year 2023.Significant CustomersSee Note 18 Segment Information in the notes to the consolidated financial statements for detailed information regardingcustomers which comprised more than 10%of consolidated re
97、venues for the years ended September 30,2021 and 2020.EmployeesAs of September 30,2021,we had approximately 112 full time equivalent employees worldwide for our consolidatedoperations.None of our employees are represented by a labor union and we have had no work stoppages in the last threefiscal yea
98、rs.We consider relations with our employees to be good.Company WebsiteThe United States Securities and Exchange Commission(“SEC”)maintains an internet site(www.sec.gov)that contains reports,proxy and information statements,and other information regarding issuers that file electronically with the SEC
99、.The Companys internet address is http:/.Through that address,the Companys Annual Report on Form 10-K,quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports are available free of charge as soon as reasonably practicable after they are filed with the SEC.The inform
100、ation contained on the Companys website is not included in,nor incorporated by reference into,this annual report on Form 10-K.Financial Information about Geographic AreasInformation regarding our sales by geographic area and percentage of sales based on the location to which the productsare shipped
101、or services rendered are in Note 18 Segment Information of the notes to the consolidated financial statements.Item 1A.Risk FactorsIf any of the risks and uncertainties set forth below actually materialize,our business,financial condition and/orresults of operations could be materially and adversely
102、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 below are not the only oneswe face.Additional risks and uncertainties not presently known to us or that we currently consider immate
103、rial may also impairour business operations.Table of Contents9Economic,Industry,and Operational RisksWe depend on a small number of customers for a significant portion of our revenue and loss of any customer couldsignificantly affect our business.Both the HPP and TS segments are reliant upon a small
104、 number of significant customers,and the loss of or significantreduction in sales to any one of which could have a material adverse effect on our business.For the fiscal year endedSeptember 30,2021,no one customer accounted for 10%or more of our total revenues for the fiscal year.For the fiscal year
105、 endedSeptember 30,2020,one customer accounted for 10%or more of our total revenues for the fiscal year.In addition,our revenuesare largely dependent upon the ability of our customers to continue to grow or need services or to develop and sell products thatincorporate our products.No assurance can b
106、e given that our customers will not experience financial or other difficulties that couldadversely affect their operations and,in turn,our results of operations.We depend on key personnel and skilled employees and face competition in hiring and retaining qualified employees.We are largely dependent
107、upon the skills and efforts of our senior management,managerial,sales and technicalemployees.None of our senior management personnel or other key employees are subject to any employment contracts exceptVictor Dellovo,our Chief Executive Officer and President.The loss of services of any of our execut
108、ives or other key personnelcould have a material adverse effect on our business,financial condition and results of operations.Our future success will dependto a significant extent on our ability to attract,train,motivate and retain highly skilled technical professionals.Our ability tomaintain and re
109、new existing engagements and obtain new business depends,in large part,on our ability to hire and retain technicalpersonnel with the skills that keep pace with continuing changes in our industry standards and technologies.The inability to hireadditional qualified personnel could impair our ability t
110、o satisfy or grow our client base.There can be no assurance that we will besuccessful in retaining current or future employees.Our success depends in part on our timely introduction of new products and technologies and our results can be impactedby the effectiveness of our significant investments in
111、 new products and technologiesWe have made significant investments in our ARIA SDS cyber security products and services that may not achieveexpected returns.We will continue to make significant investments in research,development,and marketing for ARIA products,services,and technologies.Commercial s
112、uccess depends on many factors,including innovativeness,developer support,andeffective distribution and marketing.If customers do not perceive our latest offerings as providing significant new functionality orother value,they may reduce their purchases of new software and hardware products or upgrad
113、es,unfavorably affecting revenue.We may not achieve significant revenue from new product,service,and distribution channel investments for several years.Newproducts and services may not be profitable,and even if they are profitable,operating margins for some new products andbusinesses may not be as h
114、igh as the margins we have experienced historically.Developing new technologies and products iscomplex.It can require long development and testing periods.Significant delays in new releases or significant problems in creatingnew products or services could adversely affect our revenue.To be successfu
115、l,we must respond to the rapid changes in technology.If we are unable to do so on a timely basis ourbusiness could be materially adversely affected.Our future success will depend in large part on our ability to enhance our current products and to develop new commercialproducts on a timely and cost-e
116、ffective basis in order to respond to technological developments and changing customer needs.Thedesign-in process is typically lengthy and expensive and there can be no assurance that we will be able to continue to meet theproduct specifications of our customers in a timely and adequate manner.In ad
117、dition,if we fail to anticipate or to respondadequately to changes in technology and customer preferences,or if there is any significant delay in product developments orintroductions,this could have a material adverse effect on our business,financial condition and results of operations,including the
118、risk of inventory obsolescence.Because of the complexity of our products,we have experienced delays from time to time incompleting products on a timely basis.IfTable of Contents10we are unable to design,develop or introduce competitive new products on a timely basis,our future operating results woul
119、d beadversely affected,particularly in our HPP segment.There can be no assurance that we will be successful in developing newproducts or enhancing our existing products on a timely or cost-effective basis,or that such new products or product enhancementswill achieve market acceptance.We rely on sing
120、le sources for supply of certain components and our business may be seriously harmed if our supply of anyof these components or other components is disrupted.Several components used in our HPP products are currently obtained from sole-source suppliers.We are dependent on keyvendors like Mellanox Tec
121、hnologies for our high-speed interconnect components.Generally,suppliers may terminate our purchaseorders without cause upon 30 days notice and may cease offering products to us upon 180 days notice.Although we do notconsider the risk of interruption of supply to be a significant risk in the near te
122、rm,if in the future,our key vendors,such asMellanox Technologies were to limit or reduce the sale of such components to us,or if these or other component suppliers,some ofwhich are small companies,were to experience future financial difficulties or other problems which could prevent them fromsupplyi
123、ng the necessary components,such events could have a material adverse effect on our business,financial condition andresults of operations.These sole source and other suppliers are each subject to quality and performance risks,materials shortages,excess demand,reduction in capacity and other factors
124、that may disrupt the flow of goods to us or our customers,which therebymay adversely affect our business and customer relationships.We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers willcontinue to meet our requirements.If our supply arrang
125、ements are interrupted,there can be no assurance that we would be able tofind another supplier on a timely or satisfactory basis.Any shortage or interruption in the supply of any of the components used inour products,or the inability to procure these components from alternate sources on acceptable t
126、erms,could have a materialadverse effect on our business,financial condition and results of operations.There can be no assurance that severe shortages ofcomponents will not occur in the future.Such shortages could increase the cost or delay the shipment of our products,which couldhave a material adv
127、erse effect on our business,financial condition and results of operations.Significant increases in the prices ofthese components would also materially adversely affect our financial performance since we may not be able to adjust productpricing to reflect the increase in component costs.We could incu
128、r set-up costs and delays in manufacturing should it becomenecessary to replace any key vendors due to work stoppages,shipping delays,financial difficulties,pandemics,governmentshutdowns or other factors and,under certain circumstances,these costs and delays could have a material adverse effect on o
129、urbusiness,financial condition and results of operations.Our international operation is subject to a number of risks.We market and sell our products in certain international markets and we have established operations in the U.K.Foreign-based revenue is determined based on the location to which the p
130、roduct is shipped or services are rendered and represented 8%and5%of our total revenue for the fiscal years ended September 30,2021 and 2020,respectively.If revenues generated by foreignactivities are not adequate to offset the expense of establishing and maintaining these foreign activities,our bus
131、iness,financialcondition and results of operations could be materially adversely affected.In addition,there are certain risks inherent in transactingbusiness internationally,such as changes in applicable laws and regulatory requirements,export and import restrictions,exportcontrols relating to techn
132、ology,tariffs and other trade barriers,longer payment cycles,problems in collecting accounts receivable,political instability,fluctuations in currency exchange rates,expatriation controls and potential adverse tax consequences,any ofwhich could adversely impact the success of our international activ
133、ities.In particular,it is possible activity in the United Kingdomand the rest of Europe will be adversely impacted and that we will face increased regulatory and legal complexities,including thoserelated to tax,trade,and employee relations as a result of Brexit.A portion of our revenues are from sal
134、es to foreign entities,including foreign governments,which are primarily paid in the form of foreign currencies.There can be no assurance that one ormore of such factors will not have a material adverse effect on our future international activities and,consequently,on ourbusiness,financial condition
135、 or results of operations.Table of Contents11We face competition that could adversely affect our sales and profitability.The markets for our products are highly competitive and are characterized by rapidly changing technology,frequent product performance improvements and evolving industry standards.
136、Many of our competitors are substantially larger than we are and have greater access to capital and human resources and in many cases price their products and services less than ours.In addition,due to the rapidly changing nature of technology,new competitors may emerge.Competitors may be able to of
137、fer more attractive pricing or develop products that could offer performance features that are superior to our products,resulting in reduced demand for our products.Such competitors could have a negative impact on our ability to win future business opportunities.There can be no assurance that a new
138、competitor will not attempt to penetrate the various markets for our products and services.Their entry into markets historically targeted by us could have a material adverse effect on our business,financial condition and results of operations.Pandemics,epidemics or disease outbreaks,such as the nove
139、l coronavirus(“COVID-19”),may materially adverselyaffect our business,results of operations,cash flows and financial condition.Pandemics,epidemics,or disease outbreaks,such as COVID-19 may cause harm to us,our employees,our clients,our vendors and supply chain partners,and financial institutions,whi
140、ch could have a material adverse effect on our business,results of operations,cash flows,and financial condition.The impact of a pandemic,epidemic,or other disease outbreak,such as COVID-19,may include,but would not be limited to:(i)disruption to operations due to the unavailability of employees due
141、 to illness,quarantines,risk of illness,travel restrictions or factors that limit our existing or potential workforce;(ii)volatility in the demand for or availability of our products and services,(iii)inability to meet our customers needs due to disruptions in the manufacture,sourcing and distributi
142、on of our products and services,or(iv)failure of third parties on which we rely,including our suppliers,clients,and external business partners,to meet their obligations to us,or significant disruptions in their ability to do so.As a result of the World Health Organization characterizing the COVID-19
143、 outbreak as a pandemic on March 11,2020,national,state,and local governments have taken actions such as declaring a state of emergency,social distancing guidelines,and shutting down certain businesses which are not considered essential in part or entirely.The Company has complied with such actions
144、causing most employees to work remotely in all locations.Such measures could have a material adverse effect on our business,financial condition and results of operations.Government Contracting RisksWe depend on contracts with the federal government,primarily with the Department of Defense(DoD),for a
145、 portion ofour revenue,and our business could be seriously harmed if the government significantly decreased or ceased doing business withus.We derived 4%of our total revenue in fiscal year 2021 and 6%of our total revenue in fiscal year 2020 from the DoD as a subcontractor.We expect that the DoD cont
146、racts will continue to be important to our business for the foreseeable future.If we were suspended or debarred from contracting with the federal government generally,the General Services Administration,or any significant agency in the intelligence community or the DoD,if our reputation or relations
147、hip with government agencies were to be impaired,or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us,our business,prospects,financial condition and operating results would be materially and adversely affected.Our business cou
148、ld be adversely affected by changes in budgetary priorities of the federal government.Because we derive a significant percentage of our revenue from contracts with the federal government,changes in federalgovernment budgetary priorities could directly affect our financial performance.A significant d
149、ecline in government expenditures,a shift of expenditures away from programs that we support or a change in federal government contracting policies could causefederal government agencies to reduce their purchases under contracts,to exercise their right to terminate contracts at any timewithout penal
150、ty or not to exercise options to renew contracts.Table of Contents12In years when Congress does not complete its budget process before the end of its fiscal year(September 30),governmentoperations are funded through a continuing resolution(CR)that temporarily funds federal agencies.Recent CRs have g
151、enerallyprovided funding at the levels provided in the previous fiscal year and have not authorized new spending initiatives.When thefederal government operates under a CR,delays can occur in the procurement of products and services.Historically,such delayshave not had a material effect on our busin
152、ess;however,should funding of the federal government by CR be prolonged orextended,it could have significant consequences to our business and our industry.Additionally,our business could be seriously affected if changes in DoD priorities reduces the demand for our services oncontracts supporting som
153、e operations and maintenance activities or if we experience an increase in set-asides for small businesses,which could result in our inability to compete directly for contracts.U.S.Federal government contracts contain numerous provisions that are unfavorable to us.U.S.Federal government contracts co
154、ntain provisions and are subject to laws and regulations that give the governmentrights and remedies,some of which are not typically found in commercial contracts,including allowing the government to:cancel multi-year contracts and related orders if funds for contract performance for any subsequent
155、year becomeunavailable;claim rights in systems and software developed by us;suspend or debar us from doing business with the federal government or with a governmental agency;impose fines and penalties and subject us to criminal prosecution;andcontrol or prohibit the export of our data and technology
156、.If the government terminates a contract for convenience,we may recover only our incurred or committed costs,settlementexpenses and profit on work completed prior to the termination.If the government terminates a contract for default,we may beunable to recover even those amounts,and instead may be l
157、iable for excess costs incurred by the government in procuringundelivered items and services from another source.Depending on the value of a contract,such termination could cause our actualresults to differ materially and adversely from those anticipated.As is common with government contractors,we h
158、ave experienced and continue to experience occasional performanceissues under certain of our contracts.Depending upon the value of the matters affected,a performance problem that impacts ourperformance of a program or contract could cause our actual results to differ materially and adversely from th
159、ose anticipated.Intellectual Property and Systems RisksWe may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitiveadvantage.Our ability to compete effectively against other companies in our industry depends,in part,on our ability to protect o
160、urcurrent and future proprietary technology under patent,copyright,trademark,trade secret and unfairTable of Contents13competition laws.We cannot assure that our means of protecting our proprietary rights in the United States or abroad will beadequate,or that others will not develop technologies sim
161、ilar or superior to our technology or design around our proprietary rights.In addition,we may incur substantial costs in attempting to protect our proprietary rights.Also,despite the steps taken by us to protect our proprietary rights,it may be possible for unauthorized third parties tocopy or rever
162、se-engineer aspects of our products develop similar technology independently or otherwise obtain and use informationthat we regard as proprietary and we may be unable to successfully identify or prosecute unauthorized uses of our technology.Furthermore,with respect to our issued patents and patent a
163、pplications,we cannot assure that patents from any pending patentapplications(or from any future patent applications)will be issued,that the scope of any patent protection will exclude competitorsor provide competitive advantages to us,that any of our patents will be held valid if subsequently chall
164、enged or that others will notclaim rights in or ownership of the patents(and patent applications)and other proprietary rights held by us.If we become subject to intellectual property infringement claims,we could incur significant expenses and could beprevented from selling specific products.We may b
165、ecome subject to claims that we infringe the intellectual property rights of others in the future.We cannot assurethat,if made,these claims will not be successful.Any claim of infringement could cause us to incur substantial costs defendingagainst the claim even if the claim is invalid,and could dis
166、tract management from other business.Any judgment against us couldrequire substantial payment in damages and could also include an injunction or other court order that could prevent us fromoffering certain products.We need to continue to expend resources on research and development(R&D)efforts in ou
167、r HPP segment,to meet theneeds of our customers.If we are unable to do so,our products could become less attractive to customers and our business couldbe materially adversely affected.Our industry requires a continued investment in R&D.As a result of our need to maintain or increase our spending lev
168、elsfor R&D in this area and the difficulty in reducing costs associated with R&D,our operating results could be materially harmed ifour revenues fall below expectations.In addition,as a result of CSPis commitment to invest in R&D,spending as a percent ofrevenues may fluctuate in the future.Further,i
169、f we fail to invest sufficiently in R&D or our R&D does not produce competitiveresults,our products may become less attractive to our customers or potential customers,which could materially harm our businessand results of operations.Our need for continued or increased investment in research and deve
170、lopment may increase expenses and reduce ourprofitability.Our industry is characterized by the need for continued investment in research and development.If we fail to investsufficiently in research and development,our products could become less attractive to potential customers and our business andf
171、inancial condition could be materially and adversely affected.As a result of the need to maintain or increase spending levels in thisarea and the difficulty in reducing costs associated with research and development,our operating results could be materiallyharmed if our research and development effo
172、rts fail to result in new products or if revenues fall below expectations.In addition,asa result of our commitment to invest in research and development,spending levels of research and development expenses asa percentage of revenues may fluctuate in the future.Our results of operations are subject t
173、o fluctuation from period to period and may not be an accurate indication of futureperformance.We have experienced fluctuations in operating results in large part due to the sale of products and services in relativelylarge dollar amounts to a relatively small number of customers.Customers specify de
174、livery date requirements that coincide withtheir need for our products and services.Because these customers may use our products and services in connection with a variety ofdefense programs or other projects with different sizes and durations,a customers orders for one quarter generally do not indic
175、atea trend for future orders by that customer.As such,we have not been able in the past to consistently predict when our customerswill place orders and request shipments so that we cannot always accurately plan our manufacturing,inventory,and workingcapital requirements.As a result,if orders and shi
176、pmentsTable of Contents14differ from what we predict,we may incur additional expenses and build excess inventory,which may require additional reservesand allowances and reduce our working capital and operational flexibility.Any significant change in our customers purchasingpatterns could have a mate
177、rial adverse effect on our operating results and reported earnings per share for a particular quarter.Thus,results of operations in any period should not be considered indicative of the results to be expected for any future period.Our quarterly results may be subject to fluctuations resulting from a
178、 number of other factors,including:delays in completion of internal product development projects;delays in shipping hardware and software;delays in acceptance testing by customers;a change in the mix of products sold to our served markets;changes in customer order patterns;production delays due to q
179、uality problems with outsourced components;inability to scale quick reaction capability products due to low product volume;shortages and costs of components;the timing of product line transitions;declines in quarterly revenues from previous generations of products following announcement of replaceme
180、ntproducts containing more advanced technology;inability to realize the expected benefits from acquisitions and restructurings,or delays in realizing such benefits;potential asset impairment,including goodwill and intangibles,write-off of deferred tax assets or restructuringcharges;andchanges in est
181、imates of completion on fixed price service engagements.In addition,from time to time,we have entered into contracts,referred to as development contracts,to engineer a specificsolution based on modifications to standard products.Gross margins from development contract revenues are typically lower th
182、angross margins from standard product revenues.We intend to continue to enter into development contracts and anticipate that thegross margins associated with development contract revenues will continue to be lower than gross margins from standard productsales.Another factor contributing to fluctuati
183、ons in our quarterly results is the fixed nature of expenditures on personnel,facilities and marketing programs.Expense levels for these programs are based,in significant part,on expectations of futurerevenues.If actual quarterly revenues are below managements expectations,our results of operations
184、will likely be adverselyaffected.Further,the preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets
185、 and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses duringthe reporting periods.Actual results could differ from those estimates,and changes in estimates in subsequent periods could causeour results of operations to fluctuate.Table of Contents1
186、5If we experience a disaster or other business continuity problem,we may not be able to recover successfully,which couldcause material financial loss,loss of human capital,regulatory actions,reputational harm,or legal liability.If we experience a local or regional disaster or other business continui
187、ty problem,such as a hurricane,earthquake,terroristattack,pandemic or other natural or man-made disaster,our continued success will depend,in part,on the availability of ourpersonnel,our office facilities,and the proper functioning of our computer,telecommunication and other related systems andopera
188、tions.As we attempt to grow our operations,the potential for particular types of natural or man-made disasters,political,economic or infrastructure instabilities,or other country-or region-specific business continuity risks increases.If we suffer any data breaches involving the designs,schematics,or
189、 source code for our products or other sensitiveinformation,our business and financial results could be adversely affected.We securely store our designs,schematics,and source code for our products as they are created.A breach,whetherphysical,electronic or otherwise,of the systems on which this sensi
190、tive data is stored could lead to damage or piracy of ourproducts.If we are subject to data security breaches from external sources or from an insider threat,we may have a loss in sales orincreased costs arising from the restoration or implementation of additional security measures,either of which c
191、ould adverselyaffect our business,financial condition,and results of operations.Other potential costs could include loss of brand value,incidentresponse costs,loss of stock market value,regulatory inquiries,litigation,and management distraction.In addition,a securitybreach that involved classified i
192、nformation could subject us to civil or criminal penalties,loss of a government contract,loss ofaccess to classified information,or debarment as a government contractor.Similarly,a breach that involved loss of customer-provided data could subject us to loss of a customer,loss of a contract,litigatio
193、n costs and legal damages,and reputational harm.Systems failures may disrupt our business and have an adverse effect on our results of operations.Any systems failures,including network,software or hardware failures,whether caused by us,a third party serviceprovider,unauthorized intruders and hackers
194、,computer viruses,natural disasters,power shortages or terrorist attacks,could causeloss of data or interruptions or delays in our business or that of our clients and reputational harm as a security provider.Like othercompanies,we have experienced cyber security threats to our data and systems,our c
195、ompany sensitive information,and ourinformation technology infrastructure,including malware and computer virus attacks,unauthorized access,systems failures andtemporary disruptions.We may experience similar security threats at customer sites that we operate and manage as a contractualrequirement.Pri
196、or cyber attacks directed at us have not had a material adverse impact on our business or our financial results,andwe believe that our continuing commitment toward threat detection and mitigation processes and procedures will help us minimizeor avoid such impact in the future.Due to the evolving nat
197、ure of these security threats,however,the impact of any future incidentcannot be predicted.In addition,the failure or disruption of our email,communications or utilities could cause us to interrupt or suspend ouroperations or otherwise harm our business.Our property and business interruption insuran
198、ce may be inadequate to compensate usfor all losses that may occur as a result of any system or operational failure or disruption and,as a result,our actual results coulddiffer materially and adversely from those anticipated.The systems and networks that we maintain for our clients,although highly r
199、edundant in their design,could also fail.If asystem or network we maintain were to fail or experience service interruptions,we might experience loss of revenue or face claimsfor damages or contract termination.Our errors and omissions liability insurance may be inadequate to compensate us for all th
200、edamages that we might incur and,as a result,our actual results could differ materially and adversely from those anticipated.Table of Contents16Legal and Regulatory Risks.Changes in regulations could materially adversely affect us.Our business,results of operations,or financial condition could be ma
201、terially adversely affected if laws,regulations,orstandards relating to us or our products are newly implemented or changed.In addition,our compliance with existing regulationsmay have a material adverse impact on us.Under applicable federal securities laws,we are required to evaluate and determine
202、theeffectiveness of our internal control structure and procedures.If we have a material weakness in our internal controls,our results ofoperations or financial condition may be materially adversely affected,or our stock price may decline.Risks Related to Ownership of Our Common StockOur stock price
203、may continue to be volatileHistorically,the market for technology stocks has been extremely volatile.Our common stock has experienced and maycontinue to experience substantial price volatility.The following factors could cause the market price of our common stock tofluctuate significantly:loss of a
204、major customer;loss of a major supplier;the addition or departure of key personnel;variations in our quarterly operating results;announcements by us or our competitors of significant contracts,new products or product enhancements;acquisitions,distribution partnerships,joint ventures or capital commi
205、tments;regulatory changes;sales of our common stock or other securities in the future;changes in market valuations of technology companies;andfluctuations in stock market prices and volumes.In addition,the stock market in general and the NASDAQ Global Market and technology companies in particular,ha
206、veexperienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performanceof such companies.These broad market and industry factors may materially adversely affect the market price of our common stock,regardless of our actual operating perform
207、ance.In the past,following periods of volatility in the market price of a companyssecurities,securities class action litigation has often been instituted against such companies.If any shareholders were to issue alawsuit,we could incur substantial costs defending the lawsuit and the attention of mana
208、gement could be diverted.Table of Contents17Item 2.PropertiesListed below are our principal facilities as of September 30,2021.Management considers all facilities listed below to besuitable for the purpose(s)for which they are used,including manufacturing,research and development,sales,marketing,ser
209、viceand administration.Owned orApproximateLocationPrincipal UseLeasedFloor AreaTS Segment Properties:Modcomp,Inc.Division HeadquartersLeased11,815 S.F.1182 East Newport Center DriveSales,Marketing and Deerfield Beach,FL 33442Administration Modcomp,Ltd.Sales,Marketing andLeased484 S.F.Indigo House,Mu
210、lberry Business ParkAdministration Wokingham,Berkshire RG41 2GY United Kingdom HPP Segment Properties:CSP Inc.Corporate HeadquartersLeased13,515 S.F.175 Cabot Street,Suite 210Manufacturing,Sales,Lowell,MA 01854Marketing and AdministrationItem 3.Legal ProceedingsWe are currently not a party to any ma
211、terial legal proceedings.Item 4.Mine Safety DisclosuresNot Applicable.PART IIItem 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket information.Our common stock is traded on the Nasdaq Global Market under the symbol CSPI.The followingt
212、able provides the high and low sales prices of our common stock as reported on the Nasdaq Global Market for the periodsindicated.20212020Fiscal Year:High Low High Low1st Quarter$8.71$7.09$13.60$12.012nd Quarter$12.76$7.96$14.52$5.003rd Quarter$11.60$8.47$11.40$6.214th Quarter$10.85$8.70$9.85$7.40Sto
213、ckholders.We had approximately 67 holders of record of our common stock as of December 6,2021.This numberdoes not include stockholders for whom shares were held in a“nominee”or“street”name.We believe theTable of Contents18number of beneficial owners of our shares of common stock(including shares hel
214、d in street name)at that date was approximately1,388.Dividends.As of May 14,2020,we suspended our stock repurchase program and the payment of quarterly cashdividends until further economic clarity.There were no dividends paid in fiscal year 2021.For the fiscal year ended September 30,2020 the Compan
215、y paid cash dividends as follows:Amount PaidFiscal YearDate DeclaredRecord DateDate PaidPer Share2020 12/10/201912/31/20191/15/2020$0.152020 2/12/20202/28/20203/13/2020$0.15Item 6.ReservedItem 7.Managements Discussion and Analysis of Financial Condition and Results of OperationsThis managements disc
216、ussion 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 could differ materially fromthose anticipated by the forward-looking information.You should review the“Sp
217、ecial Note Regarding Forward LookingStatements”and“Risk Factors”sections of this annual report for a discussion of important factors that could cause actual resultsto differ materially from the results described in or implied by the forward-looking statements contained in the following discussionand
218、 analysis.The following discussion should be read in conjunction with our financial statements and the related notes includedelsewhere in this filing.Observations on effects of novel coronavirus(COVID-19)On March 11,2020,the World Health Organization characterized the novel coronavirus outbreak as a
219、 pandemic.Theoutbreak has and continues to adversely affect the economies of the U.S.,U.K.,and other international markets and economies inwhich we operate.As a result of the World Health Organization characterizing the COVID-19 outbreak as a pandemic,national,state,and local governments have and co
220、ntinue to take actions such as declaring states of emergency,implementing socialdistancing and other guidelines,and shutting down and/or limiting the opening or operation of certain businesses which are notconsidered essential.In these times of pandemic,our top priorities are to protect the health,w
221、ell-being,and safety of our employees andpartners,while still focusing on the key drivers of our business.To that end,and to insure we continue to operate safety andcautiously while also meeting our public health responsibilities,the Company has adopted flexible business practices includingallowing
222、most employees to work remotely in all locations.Our sales decreased significantly for the year ended September 30,2021,which we believe is primarily due to the pandemic.This is largely the result of customers reducing their budgets.Thepandemic has also had an adverse effect on our ability to transa
223、ct one-on-one business,which we believe is important when rollingout new IT and security products.During fiscal year 2021 COVID-19 has adversely affected the distribution channel leading to significantly longer leadtimes when ordering product.Manufacturers are not producing as much product as prior
224、to the pandemic due to disruptions,resulting in supply shortages.Additionally,recent global shipping delays have exacerbated this problem.The TS segment has manyvendors it transacts with and supply shortages are pervasive with many of them.The HPP segment has also experienced shortageswith their ven
225、dors as well.Related to the supply shortage and potentially inflation,we have experienced price increases for ourproducts,which we try to pass on to the customer.We recognize the pandemic has created a dynamic and uncertain situation in the national economy,and we continue toclosely monitor the late
226、st information to make timely,informed business decisions and public disclosures regarding the potentialimpact of the pandemic on our operations.Despite reduced infection rates and ever-increasing vaccination rates in the UnitedStates,many nations and certain pockets within the United States are sti
227、ll battling variousTable of Contents19strains/variants of the novel coronavirus,creating ongoing uncertainties as to when economies will return to business as usual and what that will look like,what regulatory measures or voluntary actions will be further implemented to limit the spread of COVID-19
228、and its variants and the duration of any such measures.The extent,severity and impact of any further spread of COVID-19 variants or resurgence of COVID-19 in a given geographic region after it has hit its“peak,”and the extent to which herd immunity will be achieved through the vaccination process is
229、 still uncertain.In summary,the scope of this pandemic and its effects are unprecedented,and we cannot at this time make a reasonable estimate on the extent or duration of the impacts on our business.Please refer to Item 1A Risk Factors located in Part I in this Annual Report on Form 10-K for discus
230、sion of the risksrelated to COVID-19 on our business,financial condition,and results of operations.Overview of Fiscal 2021 Results of OperationsRevenue decreased by approximately$12.6 million,or 20%,to$49.2 million for the fiscal year endedSeptember 30,2021 versus$61.8 million for the fiscal year en
231、ded September 30,2020.Gross profit margin percentage increased,from 28%of revenues for the fiscal year ended September 30,2020 to 33%forthe fiscal year ended September 30,2021.We generated an operating loss of approximately$1.4 million for the fiscal year ended September 30,2021 as comparedto an ope
232、rating loss of approximately$1.4 million for the fiscal year ended September 30,2020.Other income,(expense)net was$2.0 million for the fiscal year ended September 30,2021 as compared to$0.4 millionfor the prior year.The increase of$1.6 million from prior year is due to a large one time gain on debt
233、forgiveness of$2.2 millionwhich did not occur in the prior year,partially offset by an increase in foreign exchange loss of$0.5 million and increase of interestexpense of$0.1 million.A one-time gain of$465k occurred in fiscal year 2021,which was a purchase price adjustment of a subsidiary(ModcompGmb
234、H)that was sold in fiscal year 2018.This is classified as discontinued operations.There are no further amounts to be receivedin connection with the purchase agreement from the original sale.The Company recorded an income tax provision of approximately$444 thousand,which reflected an effective tax ra
235、te of39%,for the year ended September 30,2021.The provision is primarily driven by the recording of a full valuation allowanceagainst US deferred tax assets that are not more-likely-than-not to be realized partially offset by the exclusion of income from theforgiveness of Paycheck Protection Program
236、 loans,the exclusion of the gain of the discontinued German entity under UK tax law,current year federal research and development credits,and the benefit resulting from the carryback of federal net operating losses toyears in which the statutory federal tax rate was 34%.Table of Contents20The follow
237、ing table details our results of operations in dollars and as a percentage of sales for the fiscal years ended:%September 30,2021 of sales September 30,2020 of sales(Dollar amounts in thousands)Sales$49,208 100%$61,793 100%Costs and expenses:Cost of sales 33,059 67%44,626 71%Engineering and developm
238、ent 2,887 6%2,798 5%Selling,general and administrative 14,624 30%15,793 26%Total costs and expenses 50,570 103%63,217 102%Operating loss (1,362)(3)%(1,424)(2)%Other income,(expense)net 2,040 4%362%Income(loss)before income taxes 678 1%(1,062)(2)%Income tax expense 444 1%384%Net income(loss)from cont
239、inuing operations 234%(1,446)(2)%Gain on sale of discontinued operations 465 1%Net income(loss)$699 1%$(1,446)(2)%RevenuesRevenue decreased by approximately$12.6 million,or 20%,to$49.2 million for the fiscal year ended September 30,2021 versus$61.8 million for the fiscal year ended September 30,2020
240、.Our TS segment revenue decreased by approximately$11.3 million consisting of a decrease of$11.9 million in our U.S.division,partially offset by an increase of$0.6 million in ourU.K.division.Our HPP segment revenue decreased by approximately$1.3 million,or 21%,primarily due to decreased productreven
241、ue of$0.3 million combined with decreased service revenue of$1.0 million.TS segment revenue changes by products and services for the fiscal years ended September 30 were as follows:Increase(decrease)2021 2020$%(Dollar amounts in thousands)Products$32,100$44,588$(12,488)(28)%Services 12,485 11,329 1,
242、156 10%Total$44,585$55,917$(11,332)(20)%The decrease in TS segment product revenue of$12.5 million during the period was the result of a$13.1 million decreasein the U.S.division,partially offset by an increase of$0.6 million in the U.K.division.Customers budgets have been cut or put onhold in the sh
243、ort term due to the pandemic leading to significantly decreased sales.The decrease in our U.S.division productrevenue year over year was primarily associated with several major customers,partially offset by a significant increase with severalother customers.The increase in the U.K.division year over
244、 year was primarily associated with an increase with one majorcustomer.The increase in TS segment service revenue of$1.2 million as compared to the prior year was due to a$1.2 millionincrease in the U.S.division.In fiscal year 2021 as compared to the prior year,the U.S.division had an increase of$1.
245、4 million inthird party maintenance and an increase of$0.8 million in managed services,partially offset by a decrease of$1.0 million ininternal and third party services revenue.Table of Contents21HPP segment revenue changes by product and services for the fiscal years ended September 30 were as foll
246、ows:Decrease 2021 2020$%(Dollar amounts in thousands)Products$3,126$3,401$(275)(8)%Services 1,497 2,475 (978)(40)%Total$4,623$5,876$(1,253)(21)%The decrease in HPP product revenue of$0.3 million in the fiscal year ended September 30,2021 was primarily the resultof an approximately$0.6 million decrea
247、se in Myricom product line shipments,partially offset with a$0.3 million increase inMulticomputer product line shipments for the fiscal year ended September 30,2021 as compared to the fiscal year endedSeptember 30,2020.This is primarily due to the pandemic affecting customers budgets.The decrease in
248、 HPP service revenue ofapproximately$1.0 million for the period was primarily the result of a$0.6 million decrease in royalty revenues on high-speedprocessing boards related to the E2D program combined with a$0.4 million decrease of Multicomputer repairs for the fiscal yearended September 30,2021 as
249、 compared to the fiscal year ended September 30,2020.Our total revenues by geographic area based on the location to which the products were shipped or services rendered wereas follows:Increase(decrease)2021%2020%$%(Dollar amounts in thousands)Americas$45,321 92%$59,178 95%$(13,857)(23)%Europe 3,203
250、7%2,282 4%921 40%Asia 684 1%333 1%351 105%Totals$49,208 100%$61,793 100%$(12,585)(20)%The$13.9 million decrease in the Americas revenue for the fiscal year ended September 30,2021 as compared to thefiscal year ended September 30,2020 was primarily due to decreased revenue by our TS segment of approx
251、imately$12.4 millionattributable to the U.S.division,combined with decreased sales by our HPP segment of approximately$1.5 million.The$0.9million increase in Europe revenue for the fiscal year ended September 30,2021 as compared to the prior year period was primarilydue to increased sales by our TS-
252、UK division of approximately$0.6 million combined with an increase in sales by our TS-USdivision of approximately$0.3 million.The$0.4 million increase in Asia revenue for the fiscal year ended September 30,2021 ascompared to the prior year period was primarily the result of increased revenue by our
253、HPP segment of$0.2 million combined witha$0.2 million increase in our TS-U.S.division.Gross MarginsOur gross margin(GM)decreased by approximately$1.1 million to$16.1 million for fiscal year 2021 as compared to GM ofapproximately$17.2 million for fiscal year 2020.The GM as a percentage of revenue inc
254、reased to 33%for fiscal year 2021 from28%for fiscal year 2020.The increase in GM as a percentage of revenue was primarily attributed to a higher percentage of servicerevenue relative to product revenue in the TS segment and a significant increase in TS segment product GM as a percentage ofrevenue.Ad
255、ditionally,the product mix,amount of net revenue recorded,and overall margin in products contributed to this increasefrom prior year.The improved product GM margin as a percentage of revenue has been a focus in fiscal year 2021,particularly inthe TS segment.Table of Contents22The following table sum
256、marizes GM changes by segment for fiscal years ended September 30:20212020Increase(Decrease)(Dollar amounts in thousands)GM$GM%GM$GM%GM$GM%TS$13,405 30%$13,553 24%$(148)6%HPP 2,744 59%3,614 62%(870)(3)%Total$16,149 33%$17,167 28%$(1,018)5%The impact of product mix within our TS segment on gross marg
257、ins for the fiscal years ended September 30 was asfollows:20212020Increase(decrease)GM$GM%GM$GM%GM$GM%(Dollar amounts in thousands)Products$5,898 18%$6,842 15%$(944)3%Services 7,507 60%6,711 59%796 1%Total$13,405 30%$13,553 24%$(148)6%The overall TS segment GM as a percentage of revenue increased to
258、 30%in fiscal year 2021 from 24%in fiscal year2020.The increase in GM as a percentage of revenue was primarily attributed to a large relative decrease in TS segment productrevenue compared to a significant increase in service revenue in fiscal year 2020 from the prior year.Additionally,both producta
259、nd service GM as a percentage of revenue increased from prior year.The$0.9 million decrease in our TS segment product GM infiscal year 2021 as compared to the prior year resulted from a decrease in GM in the U.S.division of$0.8 million combined with adecrease in the U.K division of$0.1 million.The$0
260、.8 million increase in the TS segment service GM in fiscal year 2021 ascompared to the prior year primarily resulted from increased service revenue as well as a slight increase in GM as a percentage ofrevenue in the U.S.division.The impact of product mix on gross margins within our HPP segment for t
261、he fiscal years ended September 30 was asfollows:20212020Increase(Decrease)(Dollar amounts in thousands)GM$GM%GM$GM%GM$GM%Products$1,304 42%$1,240 36%$64 6%Services 1,440 96%2,374 96%(934)%Total$2,744 59%$3,614 62%$(870)(3)%The overall HPP segment GM as a percentage of revenue decreased to 59%in fis
262、cal year 2021 from 62%in fiscal year2020.The 3%decrease in GM as a percentage of sales in the HPP segment was primarily attributed to the impact of a decrease of$0.6 million in high margin Multicomputer royalty revenues,which is all GM.The GM as a percentage of sales from productsincreased primarily
263、 due to product mix in fiscal year 2021 as compared to the prior year.Engineering and Development ExpensesOur engineering and development expenses are only in our HPP segment.These expenses had a slight increase of$0.1million from$2.8 million in fiscal year 2020 to$2.9 million for fiscal year 2021.F
264、iscal year 2021 and 2020 expenses wereprimarily for product engineering expenses incurred in connection with the development of the ARIA SDS cyber security products.Table of Contents23Selling,General and AdministrativeThe following table details our selling,general and administrative(“SG&A”)expenses
265、 by operating segment for the yearsended September 30,2021 and 2020:For the year ended September 30,$%of%ofDecreaseDecrease 2021 Total 2020 Total (Dollar amounts in thousands)By Operating Segment:TS segment$10,190 70%$11,247 71%$(1,057)(9)%HPP segment 4,434 30%4,546 29%(112)(2)%Total$14,624 100%$15,
266、793 100%$(1,169)(7)%For fiscal year 2021 compared to fiscal year 2020,the TS segment SG&A spending decrease of approximately$1.0million was primarily due to a decrease in variable compensation and salaries of$1.0 million and a decrease of$0.1 million fortravel expense.For fiscal year 2021 compared t
267、o fiscal year 2020,the HPP segment SG&A spending decrease of$0.1 million wasprimarily attributed to decreased headcount in the sales department.Other Income/ExpensesThe following table details our other income(expenses)for the years ended September 30,2021 and 2020:For the year ended$Increase Septem
268、ber 30,2021 September 30,2020 (Decrease)(Amounts in thousands)Interest expense$(350)$(228)$(122)Interest income 575 582 (7)Foreign exchange(loss)gain (488)(2)(486)Gain on debt forgiveness 2,196 2,196Other income,net 107 10 97Total other income(expense),net$2,040$362$1,678The$1.7 million increase to
269、total other income(expense),net for the year ended September 30,2021 as compared to theprior year period is primarily driven by a gain on debt forgiveness of$2.2 million,partially offset by an increase in foreignexchange loss of$0.5 million.The U.K.division has significant bank accounts with U.S.dol
270、lars and Euros.In consolidation,U.S.dollars and Euros are remeasured into the functional currency,British Pounds,of our U.K.subsidiary.This non-cashremeasurement is included in foreign exchange gain or loss on the income statement and the foreign exchange loss is primarilyfrom a U.S.Dollar and Euro
271、bank account.The US dollar and Euro weakened relative to the British Pound when comparing theexchange rate as of September 30,2021 to September 30,2020,which caused the foreign exchange loss.Interest income is primarily related to agreements that have payment terms in excess of one year(see Note 3 A
272、ccounts andLong-Term Receivable in Item 1 to this Annual Report on Form 10-K for details)from the TS-US segment as interest incomerecognized in each agreement decreases as principal payments are made.The interest expense increase of$122 thousand for the year ended September 30,2021 as compared to th
273、e prior yearperiod is related to three new multi-year agreements with vendors in the TS U.S.division in fiscal year 2021.Payments on theseagreements contain both principal and interest expense.See Note 9 Accounts payable and accrued expenses,and Other noncurrentliabilities in Item 1 to this Annual R
274、eport on Form 10-K.Table of Contents24The other income increase of$97 thousand for the year ended September 30,2021 as compared to the prior year period isprimarily related to a nonrecurring rebate we received that originated several years ago,which we did not anticipate receiving.Income TaxesThe Co
275、mpany recorded an income tax provision of approximately$444 thousand,which reflected an effective tax rate of39%,for the year ended September 30,2021.The provision is primarily driven by the recording of a full valuation allowanceagainst US deferred tax assets that are not more-likely-than-not to be
276、 realized partially offset by the exclusion of income from theforgiveness of Paycheck Protection Program loans,the exclusion of the gain of the discontinued German entity under UK tax law,and current year federal R&D credits and the benefit resulting from the carryback of federal net operating losse
277、s to years in whichthe statutory federal tax rate was 34%.For the year ended September 30,2020,the income tax provision was approximately$384 thousand,which reflected aneffective tax rate of 36%.The provision is primarily driven by the recording of a partial valuation allowance against US deferredta
278、x assets that are not more-likely-than-not to be realized partially offset by current year federal R&D credits and the benefitresulting from the carryback of federal net operating losses to years in which the statutory federal tax rate was 34%.During the period ended September 30,2021,management ass
279、essed the positive and negative evidence in the U.S.operations,and concluded that it is more likely than not that the deferred tax assets as of September 30,2021 will not be realized inlight of recent results,the ongoing impacts of COVID-19,and the resulting economic fallout.In assessing the realiza
280、bility ofdeferred tax assets,we consider taxable income in prior carryback years,as permitted under the tax law,our forecasted taxableearnings,tax planning strategies,and the expected timing of the reversal of temporary differences.This determination requiressignificant judgment,including assumption
281、s about future taxable income that are based on historical and projected information andis performed on a jurisdiction-by-jurisdiction basis.We also continue to maintain a full valuation allowance against our U.K.deferred tax assets as we have experiencedcumulative losses and do not have any indicat
282、ion that the operation will be profitable in the future to an extent that will allow us toutilize much of our net operating loss carryforwards.To the extent that actual experience deviates from our assumptions,ourprojections would be affected and hence our assessment of realizability of our deferred
283、 tax assets may change.Gain on Discontinued OperationsCSPi sold all stock of Modcomp GmbH to Reply AG on July 31,2018 for$14.4 million cash and a gain of$18.1 million.This sale was recorded in fiscal year 2018.An additional 400 thousand was included in escrow as part of the Share Purchase andAssignm
284、ent Agreement to potentially be received later as a purchase price adjustment in fiscal year 2021.This amount wasreceived in July 2021 and recorded as a gain from discontinued operations in the Consolidated Statements of Operations.Noincome taxes were provided as the transaction was a tax-free excha
285、nge in the U.K.There are no other amounts that will be receivedas part of the agreement.Liquidity and Capital ResourcesOur primary source of liquidity is our cash and cash equivalents,which increased by approximately$0.7 million to$20.0million as of September 30,2021 from$19.3 million as of Septembe
286、r 30,2020.Our significant sources of cash for the year ended September 30,2021 are primarily related to the$1.5 million net changebetween a increase in accounts receivable and long-term receivable of$9.3 million netted with an increase of$10.8 million inaccounts payable and accrued expenses,and othe
287、r-long-term liabilities.We have multi-year agreements on both the receivables(including long-term)and payables(long-term portion in other long-term liabilities).During fiscal year 2021 we entered intoagreements with customers,which contained a significant financing component totaling payments of$16.
288、7 million includinginterest due to the Company over the next four years.It was determined we were acting as the agent in the transactions andrecorded net revenue of approximately$0.9 million during fiscal year 2021Table of Contents25from these contracts.For some of these agreements,we entered into a
289、greements with vendors to pay for product over the next 4years.These payments totaled$9.2 million including interest.Additionally,deferred revenue increased$0.9 million primarily dueto a large upfront payment we received for one managed services contract.Our significant uses of cash for the year end
290、ed September 30,2021 included repayments on debt of$0.8 million,netpayments under the line-of-credit agreement of$0.6 million,and principal payments on finance leases of$0.3 million.Our cash held by our foreign subsidiary in the United Kingdom totaled approximately$10.0 million as ofSeptember 30,202
291、1,which consisted of 0.5 million Euros,0.2 million British Pounds,and 9.2 million U.S.Dollars.This cash isincluded in our total cash and cash equivalents reported within our financial statements.Due to the large pension obligation in theU.K.,we maintain a large balance of cash in the U.K.,most of th
292、e cash is from the sale of Modcomp GmbH in fiscal year 2018.As of September 30,2021 and September 30,2020,the Company maintained a line of credit with a capacity of up to$15.0 million for inventory accessible to both the HPP and TS segments.This line of credit also includes availability of a limited
293、cash withdrawal of up to$1.0 million.An amount of$14.1 million and$13.4 million were available as of September 30,2021 andSeptember 30,2020,respectively.As of September 30,2021 and September 30,2020 there were no cash withdrawals outstanding.For a further discussion of the Companys line of credit,in
294、cluding its financial covenants,see Item 1,Note 12 Line of Credit.On April 17,2020,the Company and Modcomp,Inc.,its wholly owned subsidiary each received a loan(“SBA Loans”)inthe form of a promissory note from Paragon Bank in the amounts of$827,000 and$1,353,600,respectively under the PaycheckProtec
295、tion Program,which was established under the recently enacted Coronavirus Aid,Relief,and Economic Security Act(“CARES Act”)administered by the U.S.Small Business Administration.The SBA loans had a two-year term and carried anannual fixed interest rate of 1%.The SBA Loans were forgiven in full by the
296、 SBA in the first quarter of fiscal year 2021.If cash generated from operations is insufficient to satisfy working capital requirements,we may need to access fundsthrough bank loans or other means.If we are unable to secure additional financing,we may not be able to complete development orenhancemen
297、t of products,take advantage of future opportunities,respond to competition,retain key employees,or continue toeffectively operate our business.Based on our current plans and business conditions,management believes that the Companys available cash and cashequivalents,the cash received from the SBA l
298、oans,the cash generated from operations,and availability on our line of credit will besufficient to provide for the Companys working capital and capital expenditure requirements for at least 12 months from the dateof this filing.Critical Accounting Estimates and PoliciesOur discussion and analysis o
299、f our financial condition and results of operations are based upon our consolidated financialstatements,which have been prepared in accordance with accounting principles generally accepted in the United States.Thepreparation of these financial statements requires us to make estimates and judgments t
300、hat affect the reported amounts of assets,liabilities,revenues and expenses.On an on-going basis,we evaluate our estimates,including those related to uncollectiblereceivables,inventory valuation,goodwill and intangibles,income taxes,deferred compensation,revenue recognition,retirementplans,restructu
301、ring costs and contingencies.We base our estimates on historical performance and on various other assumptionsthat are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily app
302、arent from other sources.Actual results may differ from theseestimates under different assumptions or conditions.We believe the following critical accounting policies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements:revenue recogniti
303、on,valuation allowances,specifically theTable of Contents26allowance for doubtful accounts and net deferred tax asset valuation allowance,inventory valuation,intangibles,and pension andretirement plans.Revenue RecognitionSee Note 1 Summary of Significant Accounting Policies,in the Consolidated Finan
304、cial Statements for additionalinformation regarding our revenue recognition policies.The following areas involve significant judgment and estimates:Allocating transaction price with agreements with multiple components including leasing and/or a financing componentA financing component exists when at
305、 contract inception the period between the transfer of a promised good and/orservice to the customer differs from when the customer pays for the good and/or service.As a practical expedient,we have electednot to adjust the amount of consideration for effects of a significant financing component when
306、 it is anticipated the promised goodor service will be transferred and the subsequent payment will be one year or less.Certain contracts contain a financing component including managed services contracts with financing of hardware andsoftware.The interest rate used reflects the approximate interest
307、rate consistent with a separate financing transaction with thecustomer at the inception of the agreement.Revenues from arrangements which include financing are allocated considering relativestandalone selling prices of lease and non-lease components within the agreement.The lease component includes
308、hardware,whichis subject to ASC 842,Leases.The non-lease components are subject to ASC 606,Revenue from Contracts with Customers.When product and non-managed services are sold together,the allocation of the transaction price to each performanceobligation is calculated based on the estimated relative
309、 selling price or a budgeted cost-plus margin approach,as appropriate.Dueto the complex nature of these contracts,there is significant judgment in allocating the transaction price.These estimates areperiodically reviewed by project managers,engineers,and other staff involved to ensure estimates rema
310、in appropriate.For itemssold separately,including hardware,software,professional services,maintenance contracts,other services,and third-party servicecontracts,there is no allocation as there is one performance obligation.Professional Services Sold Without ProductsThe input method using labor hours
311、expended relative to the total expected hours is used to recognize revenue forprofessional services.Only the hours that depict our performance toward satisfying a performance obligation are used to measureprogress.An estimate of hours for each professional service agreement is made at the beginning
312、of each contract based on priorexperience and monitored throughout the performance of the services.This method is most appropriate as it depicts the measure ofprogress towards satisfaction of the performance obligation.Gross versus Net RevenueWe recognize revenue from third-party service contracts a
313、s either gross sales or net sales depending on whether we areacting as a principal party to the transaction or acting as an agent or broker based on control and timing.We are a principal if wecontrol the good or service before that good or service is transferred to the customer.We record revenue as
314、gross when we are aprincipal party to the arrangement and net of cost when we are acting as a broker or agent for a third party.Under gross salesrecognition,the entire selling price is recorded in revenue and our cost to the third-party service provider or vendor is recorded incost of sales.Under ne
315、t sales recognition,the cost to the third-party service provider or vendor is recorded as a reduction to revenueresulting in net sales equal to the gross profit on the transaction.Third-party service contracts are sold in different combinationswith hardware,software,and services.When we are an agent
316、,revenue is typically recorded at a point in time.When we are theprincipal,revenue is recognized over the contract term.We have concluded we are the agent in sales of third-party maintenance,software or hardware support,and certain security software that is sold with integral third-party delivered s
317、oftware maintenancethat include critical updates.Table of Contents27Product Warranty AccrualOur product sales generally include a 90-day to three-year hardware warranty.At time of product shipment,we accrue forthe estimated cost to repair or replace potentially defective products.Estimated warranty
318、costs are based upon prior actual warrantycosts for substantially similar products.Engineering and Development ExpensesEngineering and development expenses include payroll,employee benefits,stock-based compensation and otherheadcount-related expenses associated with product development.Engineering a
319、nd development expenses also include third-partydevelopment and programming costs.We consider technological feasibility for our software products to be reached upon therelease of the software,accordingly,no internal software development costs have been capitalized.Income TaxesWe use the asset and li
320、ability method of accounting for income taxes whereby deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable to differences between the financial statement carrying amountsof existing assets and liabilities and their respective tax bases.Deferred tax
321、 assets and liabilities are measured using enacted taxrates in effect for the year in which those temporary differences are expected to be recovered or settled.The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
322、date.We also reducedeferred tax assets by a valuation allowance if,based on the weight of available evidence,it is more likely than not that someportion or all of the recorded deferred tax assets will not be realized in future periods.This methodology requires estimates andjudgments in the determina
323、tion of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.Valuationallowances are recorded against the gross deferred tax assets that management believes,after considering all available positive andnegative objective evidence,historical and prospective,with
324、greater weight given to historical evidence,that it is more likely thannot that these assets will not be realized.In addition,we are required to recognize in the consolidated financial statements,those tax positions determined to bemore-likely-than-not of being sustained upon examination,based on th
325、e technical merits of the positions as of the reporting date.Ifa tax position is not considered more-likely-than-not to be sustained based solely on its technical merits,no benefits of the positionare recognized.In addition,the calculation of the Companys tax liabilities involves dealing with uncert
326、ainties in the application ofcomplex tax regulations in a multitude of jurisdictions.The Company records liabilities for estimated tax obligations in the U.S.and other tax jurisdictions.These estimated tax liabilities include the provision for taxes that may become payable in the future.Intangible A
327、ssetsIntangible assets that are not subject to amortization are also required to be tested annually,or more frequently if events orcircumstances indicate that the asset may be impaired.We did not have intangible assets with indefinite lives at any time during thetwo years ended September 30,2021.Int
328、angible assets subject to amortization are amortized over their estimated useful lives,generally three to ten years,and are carried at net book value.The remaining useful lives of intangible assets are evaluated on anannual basis.Intangible assets subject to amortization are also tested for recovera
329、bility whenever events or changes incircumstances indicate that their carrying amount may not be recoverable.If the fair value of an intangible asset subject toamortization is determined to be less than its carrying value,then an impairment charge is recorded to write down that asset to itsfair valu
330、e.InventoriesInventories are stated at the lower of cost or market,with cost determined using the first-in,first-out method.Therecoverability of inventories is based upon the types and levels of inventories held,forecasted demand,pricing,Table of Contents28competition and changes in technology.We wr
331、ite down our inventory for estimated obsolescence or unmarketable inventory equalto the difference between the cost of inventory and the estimated market value based upon assumptions about future demand andmarket conditions.If actual market conditions are less favorable than those projected by manag
332、ement,additional inventory write-downs may be required.Pension and Retirement PlansThe funded status of pension and other post-retirement benefit plans is recognized prospectively on the consolidatedbalance sheet.Gains and losses,prior service costs and credits and any remaining transition amounts t
333、hat have not yet beenrecognized through pension expense will be recognized in accumulated other comprehensive loss,net of tax,until they areamortized as a component of net periodic pension/post-retirement benefits expense.Additionally,plan assets and obligations aremeasured as of our fiscal year-end balance sheet date(September 30).We have defined benefit and defined contribution plans in the U.K.
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