UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended September 30, 2019. | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number 000-10843
CSP 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)
(978) 954-5038
(Registrant'sRegistrant’s telephone number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of | ||
Common Stock, par value $0.01 per share | CSPI | Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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
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 the preceding 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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K10‑K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-212b‑2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller 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 revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act). Yes
The aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates of the registrant was $36,981,362$40,671,108 based on the closing sale price of $10.42$11.15 as reported on the Nasdaq Global Market.
As of December 22, 2017,3, 2019, we had outstanding 3,924,1094,153,742 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the information required in Part III of this Form 10-K10‑K are incorporated by reference from our definitive proxy statement for our 20182020 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended
Page | |||
| 2 | |||
| 11 | |||
| 19 | |||
| 19 | |||
| 19 | |||
| 20 | |||
| 20 | |||
| 31 | |||
| 32 | |||
| 32 | |||
| 33 | |||
| 33 | |||
| 33 | |||
| 33 | |||
| 34 | |||
| 34 | |||
| 34 | |||
| 36 | |||
Note: Items 1B, 6 and 7A are not required for Smaller Reporting Companies and therefore are not furnished.
i
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K10‑K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. This information may involve known and unknown risks, uncertainties and other factors that are difficult to predict and may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. 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 in which we use words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “should,” “could,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “would” and similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, the forward-looking statements are subject to significant risks and uncertainties, and thus we cannot assure you that these expectations will prove to be correct, and actual results may vary from those 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 variances include, but are not limited to, our dependence on a small number of customers for a significant portion of our revenue, our high dependence on contracts with the U.S. federal government, our reliance in certain circumstances on single sources for supply of key product components, and intense competition in the market segments in which we operate. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this document. We have based the forward-looking statements included in this annual report on Form 10-K10‑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.
1
PART I
CSP Inc. (“CSPI”("CSPi" or “the Company”"CSPI" or “we”"the Company" or “our”"we" or "our") was incorporated in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of our commercial and defense customers worldwide, CSPICSPi and its subsidiaries develop and market IT integration solutions, advanced security andproducts, managed IT services, cloud services, purpose built network adapters, and high-performance cluster computer systems.
On July 31, 2018, CSPi LTD sold all of the outstanding stock of Modcomp GmbH for $14.4 million cash, and recognized a gain of $16.8 million. The divestiture of our German operations and our increased cash position enables us to focus time and resources on our higher-margin and greater-potential growth opportunities. We are encouraged by the traction of our managed services business in the U.S. and we intend to continue to invest and focus on our new ARIA SDS cyber security products and to capitalize on the proliferation of our wireless service business.
Segments
CSPI operates in two segments;segments: Technology Solutions ("TS") and High Performance Products ("HPP") and Technology Solutions ("TS").
TS Segment
The TS segment consists of our wholly-owned Modcomp subsidiary, which operates in the United States Germany and the United Kingdom.
The TS segment generates product revenues by reselling third-party computer hardware and software as a value added reseller (“VAR”("VAR"). The TS segment generates service revenues by the delivery of integration services for complex IT environments, including advanced security; unified communications and collaboration; wireless and mobility; data center solutions; and network solutions as well as managed IT services ("MSP") that primarily serve the small and mid-sized business market ("SMB").
Third party products and professional services are marketed and sold through the Company'sCompany’s direct sales force into a variety of vertical markets, including; automotive; defense; health care; education; federal, state and local government; and maritime.
CSPi sold all of the outstanding stock of Modcomp GmbH to Reply AG on July 31, 2018 for total cash consideration of $14.4 million. CSPi recognized a one-time gain of $16.8 million. The Company determined the German subsidiary met the criteria for discontinued operations under ASC 205. The Consolidated Balance Sheets and Consolidated Statements of Operations reflect the results of Modcomp GmbH classified as discontinued operations at and as of September 30, 2018. See Note 2 to the consolidated financial statements for additional information.
HPP Segment
· | The ARIA SDS solution is a software portfolio starting with the underlying platform (orchestrator, light-weight instances), and hosted applications, as well as supporting hardware (turn-key security appliances), all developed to secure an organization’s network, enterprise-wide, to better protect critical devices, applications and high- |
2
value data, such as personally identifiable information ("PII"), from breaches. Revenue will come from the sale of licenses of our software platform components, hosted applications, turnkey appliances and the required support packages. The software licenses are renewable on an annual basis. The ARIA SDS platform and applications can be deployed on our separately sold Myricom adapters that can be deployed within our customers servers, or via our turn-key appliances that can be deployed in data centers or within the customers network to provide network security services. Alternatively, with future releases, organizations will be able deploy ARIA SDS on cloud infrastructure as a service to protect this portion of their IT environment. We had our first sale in the last half of fiscal year 2019 and the pipeline has started to build up for fiscal year 2020. We expect to have additional revenue starting in the second quarter of fiscal year 2020, which we expect will increase throughout the year. |
· | We anticipate that the ARIA SDS portfolio will be 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. We also believe the unique, patent-pending approach will be attractive to managed security services providers (MSSP) and OEMs that pursue differentiated security services for their customers. While our initial offerings of the ARIA SDS portfolio are available now, the number of offerings will continue to expand over time. |
· | The Myricom network adapters (ARC Series and SIA) are optimized for and sold into markets that require high bandwidth and low latency including (i) packet capture, (ii) financial transactions, and (iii) storage interconnect. And with our SIA organizations that require advanced security features added to their production server deployments. 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 transaction times. Our storage interconnect customers, primarily in the film industry, use our adapters for video capture and film editing. Organizations that run advanced network security features benefit from the ability to run such applications safely on our adapter preserving server performance for production applications. |
· | The nVoy Series of appliances (Packet Recorder and Packet Broker) can be deployed as part of an organization’s data security structure as a new component to complement existing systems and provides data breach verification and notification as well as compliance reporting. The primary customers will be OEMs or MSSPs that are looking to expand their product and services offerings of industry regulation compliance and breach response solutions. |
· | Multicomputer products for DSP applications are no longer being actively developed but will continue to be sold for deployment and supported for several years. Revenue flows come from servicing previously deployed products for a modest number of existing high-value defense customers. Therefore, the revenue from these products, as a percentage of overall Company revenue, is expected to decline over time. |
Sales Information by Industry Segment
The following table details our sales by operating segment for fiscal years ending September 30, 20172019 and 2016.2018. Additional segment and geographical information is set forth in Note 1418 to ourthe consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
| 2019 |
| % |
| 2018 |
| % |
| ||
|
| (Dollar amounts in thousands) |
| ||||||||
TS |
| $ | 71,159 |
| 90 | % | $ | 62,437 |
| 86 | % |
HPP |
|
| 7,902 |
| 10 | % |
| 10,479 |
| 14 | % |
Total Sales |
| $ | 79,061 |
| 100 | % | $ | 72,916 |
| 100 | % |
3
| Segment | 2017 | % | 2016 | % | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| HPP | $ | 13,844 | 12 | % | $ | 16,342 | 16 | % | ||||||
| TS | 97,638 | 88 | % | 87,025 | 84 | % | ||||||||
| Total Sales | $ | 111,482 | 100 | % | $ | 103,367 | 100 | % | ||||||
TS Segment
Products and Services
Integration Solutions
In the TS segment, we focus on value-added reseller ("VAR") integrated solutions including third-party hardware, software and technical computer-related consulting services and managed services. Our value proposition is our ability to integrate diverse third-party components together into a complete solution to install the system at the customer site and to offer high value IT consulting services to deliver solutions.
Third-Party Hardware and Software
We sell third-party hardware and software products in the information technology market, with a strategic focus on industry standard servers and data center infrastructure solutions, midrange data storage infrastructure products, network products, unified communications, and IT security hardware and software solutions. Our key offerings include products from HPE,HPE/Aruba, Cisco Systems, IBM,Palo Alto Networks, DellEMC, Juniper Networks, Citrix, Dell, Intel, VMWare, Fortinet, Microsoft and Checkpoint. Through our business relationships with these vendors, we are able to offer competitively priced robust products to meet our customers'customers’ diverse technology needs, providing procurement and engineering expertise in server infrastructure, storage, security, unified communications and networking, to the small-to-medium sized businesses (“SMBs”("SMBs") and large enterprise businesses (“LEBs”("LEBs") with complex IT environments. We offer our customers a single point of contact for complex multi-vendor technology purchases. Many of our SMB customers have unique technology needs and may lack technical purchasing expertise or have very limited IT engineering resources on staff. We also provide installation, integration, logistical assistance and other value-added services that customers may require. Our current customers are in web and infrastructure hosting, education, telecommunications, healthcare services, distribution, financial services, professional services and manufacturing. We target SMBs and LEB customers across all industries.
Professional Services
We provide professional IT consulting services in the following areas:
· | Implementation, integration, migration, configuration, installation services and project management. |
· | Hyper-Converged Infrastructure ("HCI") - We assist our clients with designing and implementing HCI solutions from multiple vendors including DellEMC, Nutanix, HPE and Cisco. HCI is a software-centric architecture that tightly integrates compute, storage and virtualization resources in a single system. The benefits of an HCI solution are improved performance, scalability and flexibility all in a reduced footprint. |
· | Virtualization - We help our customers implement virtualization solutions using products from companies such as VMWare and Citrix that allow one computer to do the job of multiple computers by sharing resources of a single computer across multiple environments. Virtualization eliminates physical and geographical limitations and enables users to host multiple operating systems and applications on fewer servers. Benefits include energy cost savings, lower capital expenditure requirements, high availability of resources, better desktop management, increased security and improved disaster recovery. |
· | Enterprise security intrusion prevention, network access control and unified threat management. Using third-party products from companies like Palo Alto, Aruba Networks, Juniper Networks, Fortinet, Checkpoint and Cisco Systems, our services are designed to ensure data security and integrity through the establishment of virtual private networks, firewalls and other technologies. |
· | IT security compliance services. We provide services for IT security compliance with personal privacy laws such as the Payment Card Industry Data Security Standard ("PCI DSS"), the Health Insurance Portability and |
4
Accountability Act of 1996 ("HIPAA"), and internal control regulations under the Sarbanes-Oxley Act ("SOX"). |
· | Unified communications, wireless and routing and switching solutions using Cisco Systems and Aruba Networks products and services. |
· | Custom software applications and solutions development and support. We develop custom applications to customer specifications using industry standard platforms such as Microsoft.Net, SharePoint and OnBase. We are a Microsoft Gold Partner. |
· | Managed IT services that include monitoring, reporting and management of alerts for the resolution and preventive general IT and IT security support tasks. |
· | Maintenance and technical support for third-party products including hardware and software, operating system and user support. |
Managed and Cloud Services
As consumption models continue to evolve in our industry, Modcomp haswe have developed a robust managed & cloud services offering to provide alternative solutions to traditional capital expenditure investments in IT solutions and IT operations for our clients. Our value is to provide an elastic offering that will alsoallow the client to scale and consume these offerings with monthly billing 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 wired and wireless), data center (which includes compute, storage and virtualization), desktops, unified communications platforms and security. |
· | Managed and Hosted Unified Communication as a Service via a Cisco Collaboration offering under an annuity program. |
· | Managed Security (firewall, endpoint protection, malware, anti-virus and SIEM). |
· | Managed BackUp and Replication. |
· | Cloud services that include Microsoft Office 365, Azure, Greencloud and Amazon Web Services. |
Markets, Marketing and Dependence on Certain Customers
We are an IT systems integrator and computer hardware and software VAR. We also provide technical services to achieve a 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 a myriad of infrastructure products with customized integration consulting services and managed services to meet the unique requirements of our customers. We market the products and services we sell through sales offices in the U.S., Germany and the U.K. using our direct sales force (for a list of our locations, see Item 2 of this Form 10-K).
Competition
Our primary competition in the TS segment is other VARs ranging from small companies that number in the thousands, to large enterprises such as CDW, PC Connection, Insight, MoreDirect,Presidio, Dimension Data, Bechtle AG, Presidio and Computacenter AG & Co oHG.Limited. In addition, we compete directly with many of the companies that manufacture the third-party products we sell, including Cisco Systems, IBM, Hewlett Packard (HP)(HPE), EMC (now part of Dell) and others. In the network
5
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 national competitors as HP/EDS, IBM and Cap Gemini.
Nearly all of our product offerings are available through other channels. Favorable competitive factors for the TS segment include procurement capability, product diversity which enables the delivery of complete and custom solutions to our customers and the strength of our key business relationships with the major IT OEMs. We also consider our ability to meet the unique and/or specialized needs of the SMB and LEB markets and our strong knowledge of the IT products that we sell to be a key competitive advantage. Our ability to provide managed services through our network operations center and the consulting integrationprofessional IT services required to design and install the custom IT solutions that fitto address our customers' IT needs are distinct competitive advantages. Unfavorable competitive factors include low name recognition, limited geographic coverage and pricing.
Backlog
The backlog of customer orders and contracts for the TS segment was approximately $12.7$4.0 million at
HPP Segment
Products and Services
The mission of the HPP team is to deliver a differentiated, smarter approach to cybersecurity. Our software-defined platform makes it easier for organizations to achieve enterprise-wide network security and protection of critical assets, applications and devices by improving their network visibility capabilities and accelerating their incident response.
Products
The ARIA SDS solution will give organizations an automated, central, and coordinated way to accelerate cyber threat detection and response, implement and enforce security polices, control which applications can access critical assets, and to protect applications and the associated data. The ARIA Orchestrator ("SDSo") and instances ("SDSi"), provide the foundation of the ARIA platform, so that a series of lightweight advanced security applications can be deployed, provisioned and managed uniformly across any sized organization.
These instances can be deployed in a variety of scenarios including bare metal servers, virtual machines ("VMs"), and container-based compute environments. The ARIA SDSo will automatically detect any instances and will programmatically execute the specified applications security feature set strengthening an organization's security posture.
For customers that desire a turnkey solution, a bundled offering can be created for deployment and opens the possibility for professional services and integration services offerings to our channel.
ARIA SDS APPLICATIONS
The deployment of hosted applications bring life to the ARIA SDS platform. Application availability will expand over time as new products are released. However, the current offerings we believe have significant market potential.
1) ARIA SDS Packet Intelligence: The ARIA Packet Intelligence ("PI") application directs all of an organization’s network traffic to existing intrusion detection systems (“IDS”) security tools such as security information and event management solutions ("SIEMs"), user and entity behavior analytics ("UEBA"), or network intrusion protection systems ("NIPS” or “IPS"), and making these tools more effective at detecting network-born threats.
6
The ARIA PI application will be available as licensed functionality within a low-cost high-availability ("HA") security appliance, or probe, that taps into an organization’s network infrastructure, as well as on the Myricom Secure Intelligent Adapter ("SIA"). The probe will be able to mine data at 10-25G line rates and perform remedial actions to stop threats on a per-traffic stream basis while minimizing impact on network traffic performance. Built-in APIs allow compatible 3rd party threat detection tools to take actions to stop detected threats. It is our belief that competing solutions currently do not provide this mix and level of capability. We will be able to provide a packaged solution by installing 3rd party IPS/IDS applications, onto ARIA hardware appliances that run alongside and are fed by ARIA SDS applications, such as Packet Intelligence. The ARIA PI application will be able to improve IPS or IDS performance by preprocessing the data feeds, allowing such solutions to run effectively at higher line rates.
2) ARIA SDS Packet Capture: Our Sniffer10G ("SNF") software is used by intelligence agencies for packet capture, network surveillance applications, and to perform detailed cyber-threat analysis. It’s a recommended solution to increase the Zeek IDS (formerly known as Bro) to support 10G line rates rather than the standard 1G. With the introduction of ARIA SDS and the Myricom SIA, SNF will be upgraded to support a 25G line-rate. When used in conjunction with the Packet Intelligence application, the SNF application can provide the details required to determine the exact type of threat and/or identify the compromised data records.
3)ARIA SDS KMS (Key Management Server): The ARIA KMS application will make it easier to add encryption and decryption capabilities to applications which leverage a standards-based key management interoperability protocol ("KMIP") client. For example, each of VMware’s vSphere and vSAN instances leverage a KMIP client to encrypt their application data output. As such, they need to be fed KMIP compatible keys to perform encryption. Depending upon the size of the environment, this could require hundreds of keys per minute. Our KMS key management server solution provides such KMIP keys securely and rapidly at scale while ensuring that the key servers are highly available at all times. Our application was designed to solve the deployment complexity challenges currently associated with key management.
4) ARIA AIR (Automated Investigative Response) The ARIA AIR and Packet Recorder applications will make it easier to detect data breaches and exfiltrated data from critical data applications. Used in conjunction with threat intelligence tools which will alert if an internal system is accessing a bad site, we ingest the alert use it to trigger a search our recordings of the traffic flowing from the critical applications to determine if there is a match. This indicates a breach and provides a record of all the records that have been exfiltrated.
MYRICOM NETWORK ADAPTERS
Myricom ARC Series product line includes a portfolio of Ethernet adapters and specialized software, which is branded as DBL for financial institutions and Sniffer10G ("SNF") for network monitoring. Both are compatible with Linux, Windows, Mac OS X, and VMware ESX. Our adapters act as stand-alone Network Interface Cards ("NIC”) and support purpose-built for applications that provide high bandwidth, low latency and line-rate packet capture, and processing off load for high-frequency financial trading and network traffic analysis applications.
Myricom Secure Intelligent Adapter ("SIA") is our next-generation adapter and will provide additional compute capabilities and specialized hardware to run the ARIA SDS platform and applications. A 25G version of SNF is being developed to deliver higher line rates as required by enterprise and government customers. This will also let these organizations achieve lossless packet capture and packet inspection, which is required for network surveillance use cases and tools, such as lawful intercept, deep packet inspection, forensic tools, and threat detection applications. Other customers for the SIA include OEMs and MSSP partners to run their own applications upon.
ARIA SECURITY APPLIANCES
ARIA Security Appliances provides a standalone solution that can be either deployed in line to provide network security or within a data center to provide security services. These appliances are built with one or multiple built in SIA adapters. This allows for broader options to deploy our services in a turnkey fashion.
7
nVoy Series is comprised of a 100G Packet Broker and a 10G Packet Recorder appliance optimized to run our ARIA software. These tools assist customers in the deployment of our ARIA solution into higher speed networks, as well as provide the compute and storage intensive functions needs to provide some of our services such as Packet recording.
MULTICOMPUTER PRODUCTS
Multicomputer products portfolio includes the 2000 SERIES VME and 3000 SERIES VXS systems. The 2000 SERIES products, based on PowerPC RISC processors with AltiVec™ technology, high-speed memory, and Myrinet-2000™ cluster interconnect, are currently is use by customers in the aerospace, commercial, and defense markets. The 3000 SERIES VXS product line, incorporating the Freescale QorIQ PowerPC processors with AltiVec technology, targets high-performance DSP, signal intelligence ("SIGINT"), and radar and sonar applications in airborne, shipboard, and unmanned aerial vehicle ("UAV") platforms where space, power, and cooling are at a premium. The HPP segment will continue to ship and repair existing Multicomputer products to its customer base and support an installed base of DSP systems.
Royalties on Multicomputer products
We license the design of certain 2000 SERIES computer processor boards and switch interconnect technology to third parties. In exchange for licensing this technology, we receive a royalty payment for each processor board that utilizes our design for these products.
Markets, Marketing and Dependence on Certain Customers
Aerospace & Defense Market
Our focus for fiscal 2020 and beyond is to continue our support of established Multicomputer and Myricom products allowing system deployments to be made by government entities. These programs have support requirements that often extend beyond twenty years.
Financial Transactions Market
Myricom network adapters with DBL application software address the need for the ultra-low latency required in the world of financial trading. Running DBL on the Myricom ARC Series provides acceleration for 10G Ethernet environments, with benchmarked application-to-application latency in the single digit microsecond range for Linux and Microsoft Windows operating systems.
Packet Capture Market
Myricom Sniffer10G, and in development, the 25G software, running on Myricom Ethernet adapters, provides enterprise and government customers and partners the ability to capture, inject, and analyze network traffic at line rate for all Ethernet packet sizes, with low-cost CPU overhead. Sniffer10G serves the following market segments: network surveillance, monitoring and analysis, testing, measurement, and packet generation, as well as a technology component within intrusion detection systems ("IDS"), forensic tools, and threat detection and response solutions.
Storage Interconnect Market
Myricom ARC Series network adapters are used in a wide range of networked applications, including those that connect to storage subsystems using Ethernet. Many of these customers are using content-creation applications requiring high-performance networking from the storage system to video-editing workstations.
8
Cyber Security Products Market
The ARIA SDS solution is targeted at organizations that need to get additional functionality out of their current cyber security solutions to find and stop intrusion threats, while also reducing their operating costs. While our ARIA SDS solutions will be offered through our direct sales channel, it is more likely that sales will come through via independent software vendor channels to the end customers. These value added resellers will find ARIA appealing to expand their portfolio of security products and services and replace less-effective tools and processes in their customer environments.
OEMs in the cyber security segments will be candidates for ARIA SDS deployments. These vendors can benefit from integrating the ARIA applications as internal solution toolsets to allow their application to scale, add critical functionality, or solve particular problems, such as poor performance. OEMs are interested in the Myricom Adapters including our SIA running our ARIA SDS applications, for use as Smart NICs within their appliances. We believe this will be a large growing market we can participate in in the coming years.
Another target for the ARIA solution will be the managed security services providers, as these providers’ desire simple, yet differentiated, solutions that can be deployed across their customer bases. The orchestration and automation capabilities found in ARIA SDS are valuable as they allow these security service providers to scale their offerings while increasing the productivity of their security operation center staff.
Competition
CSPi’s competition in the cybersecurity space comes primarily from the large, traditional security vendors like Dell, IBM, and Intel. Due to the ARIA’s approach to network and data security, we also face competition from traditional security tools and current approaches to finding network based attacks. The competition includes common firewall manufacturers with broad portfolios such as Palo Alto or Cisco, and in the case of data packet brokers, Gigamon and Ixia. Competitors for ARIA SDS encryption include applications and appliances provided by Thales, HPE’s Voltaic group, and other smaller market players.
In the crowded security products market, our history of supporting defense and government military programs, strong security application expertise, and the ability to develop optimized products for OEMs will help set us apart. However, we must continually develop new features and solutions to stay abreast of evolving customer requirements and leverage advances in technology. One example is Intel’s chip-level roadmap that may provide additional functionality for our ARIA SDS solution but our competitors could also attempt to leverage this. Some of these competitors may also be potential go-to-market partners or OEM customers looking to integrate our capabilities within their products and solutions.
Customers who need a combination of advanced data protection features and who require optimized application performance are best suited to the ARIA solution. Security adapter products will also leverage previous generation Myricom ARC Series network adapter capabilities that include advanced filtering, support for kernel bypass technologies, lossless packet capture, and precision time stamping. These new capabilities will offer a variety of security service combinations that our customers can put to use.
Manufacturing, Assembly and Testing
Currently, all Multicomputer products are shipped to our customers directly from our plant in Lowell, Massachusetts. Our manufacturing activities consist mainly of final assembly and testing of printed circuit boards and systems that are designed by us and fabricated by outside third-party vendors.
Upon our receipt of material and components from outside suppliers, our quality assurance technicians inspect these products and components. During manufacture and assembly, both sub-assemblies and completed systems are subjected to extensive testing, including burn-in and environmental stress screening designed to minimize equipment failure at delivery and over the useful service life of the system. We also use diagnostic programs to detect and isolate
9
potential component failures. A comprehensive log is maintained of past failures to monitor the ongoing reliability of our products and improve design standards.
Currently, Myricom products, including the nVoy appliances and Myricom network adapters, are shipped to our customers directly from our plant in Lowell, Massachusetts. The packet recorder and packet broker appliances are sourced from third-party partners, integrated with CSPi software and resold under the CSPi brand. Our network adapters are designed in-house and fabricated by outside third party vendors. Material and components received from outside suppliers are inspected by our quality assurance technicians.
The ARIA SDS solution (platform and applications) will be downloaded and licensed from servers or content-delivery services directly controlled by CSPi. The ARIA software can be sold in conjunction with the Myricom SIA, or our appliances, which may be preloaded with the appropriate images. Licensing will be handled by the ARIA SDSo which will be accessible by CSPi’s licensing severs to allow proper flexible services feature set activation and payment.
We provide a warranty covering defects arising from the sale of Multicomputer and Myricom products, which varies from 90 days to three years, depending upon the particular unit in question.
Sources and Availability of Raw Materials
Several components used in our HPP segment products are obtained from sole-source suppliers. We are dependent on key vendors such as Xilinx or NXP for a variety of processors for certain products and Wind River Systems, Inc. for VxWorks operating system software. Despite our dependence on these sole-source suppliers, based on our current forecast and our projected sales obligations, we believe we have adequate inventory on hand and our current near-term requirements can be met in the existing supply chain.
Research and Development
For the year ended September 30, 2019, our expenses for R&D were approximately $2.8 million compared to approximately $3.3 million for fiscal year 2018. Expenditures for R&D are expensed as they are incurred. Product development efforts in fiscal year 2019 involved development of the ARIA SDS product set, and enhancements to our Myricom products, in which we expect to continue to make investments related to the development of new hardware adapter products and the ARIA SDS software that enables the hardware to meet the needs of specific applications. Our current R&D plan is intended to extend the usefulness and marketability of these products by adding features and capabilities to meet the needs of our markets.
Intellectual Property
We rely on a combination of trademark and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights. We have two pending patents for the ARIA SDS software and will be pursuing additional patent rights over time.
Backlog
The backlog of customer orders and contracts in the HPP segment was approximately $0.5 million at September 30, 2019 as compared to $1.0 million at September 30, 2018. Our backlog can fluctuate greatly. These possible large fluctuations can be due to the timing of receipt of large orders often for purchases from prime contractors for sales to the government. It is expected that all of the customer orders in backlog will ship within the next twelve months from September 30, 2019.
10
Significant Customers
See Note 1418 in the notes to the consolidated financial statements for detailed information regarding customers which comprised 10% or more of consolidated revenues for the years ended
Employees
As of September 30, 2017
Company Website
The Company’s internet address is http://www.cspi.com. Through that address, the Company’s 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 United States Securities and Exchange Commission (Securities and Exchange Commission or Commission). The information contained on the Company’s website is not included in, nor incorporated by reference into, this annual report on Form 10‑K.
Financial Information about Geographic Areas
Information regarding our sales by geographic area and percentage of sales based on the location to which the products are shipped or services rendered are in Note 1418 of the notes to the consolidated financial statements.
Item 1A. Risk Factors If any of the risks and uncertainties set forth below actually materialize, our business, financial condition and/or results of operations could be materially and adversely affected, the trading price of our common stock could decline and a stockholder could lose all or part of its, his or her investment. The risks and uncertainties set forth below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. We depend on a small number of customers for a significant portion of our revenue and loss of any customer could significantly affect our business. Both the HPP and TS segments are reliant upon a small number of significant customers, and the loss of or significant reduction in sales to any one of which could have a material adverse effect on our business. For the fiscal year ended September 30, We depend on key personnel and skilled employees and face competition in hiring and retaining qualified employees. We are largely dependent upon the skills and efforts of our senior management, managerial, sales and technical employees. None of our senior management personnel or other key employees are subject to any employment contracts except Victor Dellovo, our Chief Executive Officer and President. The loss of services of any of our executives or other key personnel could have a material adverse effect on our business, financial condition and results of operations. Our future success will depend to a significant extent on our ability to attract, train, motivate and retain highly skilled technical professionals. Our ability to maintain and renew existing engagements and obtain new business depends, in large part, on our ability to hire and retain technical personnel with the skills that keep pace with continuing changes in our industry standards and technologies. The inability to hire additional qualified personnel could impair our ability to 11 satisfy or grow our client base. There can be no assurance that we will be successful 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 impacted by the effectiveness of our significant investments in new products and technologies We have made significant investments in our Aria SDS cyber security products and services that may not achieve expected returns. We will continue to make significant investments in research, development, and marketing for Aria products, services, and technologies. Commercial success depends on many factors, including innovativeness, developer support, and effective distribution and marketing. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of new software and hardware products or upgrades, unfavorably affecting revenue. We may not achieve significant revenue from new product, service, and distribution channel investments for several years. New products and services may not be profitable, and even if they are profitable, operating margins for some new products and businesses may not be as high as the margins we have experienced historically. Developing new technologies and products is complex. It can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue. We depend on contracts with the federal government, primarily with the Department of Defense ("DoD"), for a significant portion of our revenue, and our business could be seriously harmed if the government significantly decreased or ceased doing business with us. We derived To be successful, we must respond to the rapid changes in Our future success will depend in large part on our ability to enhance our current products and to develop new commercial products on a timely and cost-effective basis in order to respond to technological developments and changing customer needs. The design-in process is typically lengthy and expensive and there can be no assurance that we will be able to continue to meet the product specifications of our customers in a timely and adequate manner. In addition, if we fail to anticipate or to respond adequately to changes in technology and customer preferences, or if there is any significant delay in product developments or introductions, this could have a material adverse effect on our business, financial condition and results of operations, including the risk of inventory obsolescence. Because of the complexity of our products, we have experienced delays from time to time in completing products on a timely basis. If we are unable to design, develop or introduce competitive new products on a timely basis, our future operating results would be adversely affected, particularly in our HPP segment. There can be no assurance that we will be successful in developing new products or enhancing our existing products on a timely or cost-effective basis, or that such new products or product enhancements will achieve market acceptance. We rely on single sources for supply of certain components and our business may be seriously harmed if our supply of any of 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 key vendors like Mellanox Technologies for our high-speed interconnect components. Generally, suppliers may terminate our purchase orders without cause upon 30 12 component suppliers, some of which are small companies, were to experience future financial difficulties or other problems which could prevent them from supplying the necessary components, such events could have a material adverse effect on our business, financial condition and results 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 that may disrupt the flow of goods to us or our customers, which thereby may 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 will continue to meet our requirements. If our supply arrangements are interrupted, there can be no assurance that we would be able to find another supplier on a timely or satisfactory basis. Any shortage or interruption in the supply of any of the components used in our products, or the inability to procure these components from alternate sources on acceptable terms, could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that severe shortages of components will not occur in the future. Such shortages could increase the cost or delay the shipment of our products, which could have a material adverse effect on our business, financial condition and results of operations. Significant increases in the prices of these components would also materially adversely affect our financial performance since we may not be able to adjust product pricing to reflect the increase in component costs. We could incur set-up costs and delays in manufacturing should it become necessary to replace any key vendors due to work stoppages, shipping delays, financial difficulties or other factors and, under certain circumstances, these costs and delays could have a material adverse effect on our business, financial condition and results of operations. Our international We market and sell our products in certain international markets and we have established operations in the U.K. 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 service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortages or terrorist attacks, could cause loss of data or interruptions or delays in our business or that of our clients and reputational harm as a security provider. Like other companies, we have experienced cyber security threats to our data and systems, our company sensitive information, and our information technology infrastructure, including malware and computer virus attacks, unauthorized access, systems failures and temporary disruptions. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. Prior cyber attacks directed at us have not had a material adverse impact on our business or our financial results, and we believe that our continuing commitment toward threat detection and mitigation processes and procedures will avoid such impact in the future. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted. 13 In addition, the failure or disruption of our email, communications or utilities could cause us to interrupt or suspend our operations or otherwise harm our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated. The systems and networks that we maintain for our clients, although highly redundant in their design, could also fail. If a system or network we maintain were to fail or experience service interruptions, we might experience loss of revenue or face claims for damages or contract termination. Our errors and omissions liability insurance may be inadequate to compensate us for all the damages that we might incur and, as a result, our actual results could differ materially and adversely from those anticipated. We 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. 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 offer 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 competitor will not attempt to penetrate the various markets for our products and services. Their entry into markets historically targeted by us Our business could 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 federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts. In years when Congress does not complete its budget process before the end of its fiscal year (September 30), government operations are funded through a continuing resolution Additionally, our business could be seriously affected if changes in DoD priorities reduces the demand for our services on contracts supporting some 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 contain provisions and are subject to laws and regulations that give the government rights 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 year become unavailable; · claim rights in systems and software developed by us; 14 · 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; and · control or prohibit the export of our data and technology. If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may be unable to recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated. As is common with government contractors, we have experienced and continue to experience occasional performance issues under certain of our contracts. Depending upon the value of the matters affected, a performance problem that impacts We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitive advantage. Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and unfair competition laws. We cannot assure that our means of protecting our proprietary rights in the United States or abroad will be adequate, or that others will not develop technologies similar 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 to copy or reverse-engineer aspects of our products develop similar technology independently or otherwise obtain and use information that 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 applications, we cannot assure that patents from any pending patent applications (or from any future patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged or that others will not claim 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 be prevented from selling specific products. We may become subject to claims that we infringe the intellectual property rights of others in the future. We cannot assure that, if made, these claims will not be successful. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products. Our need for continued or increased investment in research and development may increase expenses and reduce our profitability. Our industry is characterized by the need for continued investment in research and development. If we fail to invest sufficiently in research and development, our products could become less attractive to potential customers and our business and financial condition could be materially and adversely affected. As a result of the need to maintain or increase spending levels in this area and the difficulty in reducing costs associated with research and development, our operating results could be materially harmed if our research and development efforts fail to result in new products or if revenues fall below expectations. In addition, as a result of our commitment to invest in research and development, spending levels of research and development expenses as a percentage of revenues may fluctuate in the future. 15 Our results of operations are subject to fluctuation from period to period and may not be an accurate indication of future performance. We have experienced fluctuations in operating results in large part due to the sale of products and services in relatively large dollar amounts to a relatively small number of customers. Customers specify delivery date requirements that coincide with their need for our products and services. Because these customers may use our products and services in connection with a variety of defense programs or other projects with different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer. As such, we have not been able in the past to consistently predict when our customers will place orders and request shipments so that we cannot always accurately plan our manufacturing, inventory, and working capital requirements. As a result, if orders and shipments differ from what we predict, we may incur additional expenses and build excess inventory, which may require additional reserves and allowances and reduce our working capital and operational flexibility. Any significant change in our customers’ purchasing patterns could have a material 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. High quarterly book-ship ratios may pressure inventory and cash flow management, necessitating increased inventory balances to ensure quarterly revenue attainment. Increased inventory balances tie up additional capital, limiting our operational flexibility. Some of our customers may have become conditioned to wait until the end of a quarter to place orders in the Our quarterly results may be subject to fluctuations resulting from a 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 quality 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 replacement products 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 restructuring charges; and · changes in estimates of completion on fixed price service engagements. 16 In addition, from time to time, we have entered into contracts, referred to as development contracts, to engineer a specific solution based on modifications to standard products. Gross margins from development contract revenues are typically lower than gross margins from standard product revenues. We intend to continue to enter into development contracts and anticipate that the gross margins associated with development contract revenues will continue to be lower than gross margins from standard product sales. Another factor contributing to fluctuations 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 future revenues. If actual quarterly revenues are below management’s expectations, our results of operations will likely be adversely affected. Further, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and changes in estimates in subsequent periods could cause our results of operations to fluctuate. Changes in regulations could materially adversely affect us. Our business, results of operations, or financial condition could be materially adversely affected if laws, regulations, or standards relating to us or our products are newly implemented or changed. In addition, our compliance with existing regulations may have a material adverse impact on us. Under applicable federal securities laws, we are required to evaluate and determine If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause 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 continuity problem, such as a hurricane, earthquake, terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. 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 source code for our products or other sensitive information, 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, whether physical, electronic or otherwise, of the systems on which this sensitive data is stored could lead to damage or piracy of our products. If we are subject to data security breaches from external sources or from an insider threat, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could adversely affect our business and financial results. Other potential costs could include loss of brand value, incident response costs, loss of stock market value, regulatory inquiries, litigation, and management distraction. In addition, a security breach that involved classified information could subject us to civil or criminal penalties, loss of a government contract, loss of access 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, litigation costs and legal damages, and reputational harm. 17 We need to continue to expend resources on research and development ("R&D") efforts, particularly our HPP segment, to meet the needs of our customers. If we are unable to do so, our products could become less attractive to customers and our business could be materially adversely affected. Our industry requires a continued investment in Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting. Effective internal control over financial reporting and disclosure controls and procedures are necessary While our management will continue to review the effectiveness of our internal control over financial reporting and disclosure controls and procedures, there is no assurance that our disclosure controls and procedures or our internal control over financial reporting will be effective in accomplishing all control objectives, including the prevention and detection of fraud, all of the time. Our stock price may continue to be volatile Historically, the market for technology stocks has been extremely volatile. Our common stock has experienced and may continue to experience substantial price volatility. The following factors could cause the market price of our common stock to fluctuate significantly: · loss of a 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 commitments; · regulatory changes; · sales of our common stock or other securities in the future; · changes in market valuations of technology companies; and · fluctuations in stock market prices and volumes. 18 In addition, the stock market in general and the NASDAQ Global Market and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a Listed below are our principal facilities as of September 30, Owned or Approximate Location Principal Use Leased Floor Area TS Segment Properties: Modcomp, Inc. Division Headquarters Leased 11,815 S.F. 1182 East Newport Center Drive Sales, Marketing and Deerfield Beach, FL 33442 Administration Modcomp, Ltd. Sales, Marketing and Leased 887 S.F. Trinity Court, Molly Millars Lane Administration Wokingham, Berkshire United Kingdom HPP Segment Properties: CSP Inc. Corporate Headquarters Leased 13,515 S.F. 175 Cabot Street, Suite 210 Manufacturing, Sales, Lowell, MA 01854 Marketing and Administration We are currently not a party to any material legal proceedings. Not Applicable. PART II Item 5.Market for Market information. Our common stock is traded on the Nasdaq Global Market under the symbol CSPI. The following table provides the high and low sales prices of our common stock as reported on the Nasdaq Global Market for the periods indicated. 2019 2018 Fiscal Year: High Low High Low 1st Quarter $ 13.45 $ 8.78 $ 17.00 $ 10.60 2nd Quarter $ 11.92 $ 9.31 $ 18.89 $ 10.41 3rd Quarter $ 15.50 $ 10.30 $ 12.18 $ 8.75 4th Quarter $ 15.18 $ 12.21 $ 14.87 $ 9.71 Stockholders. We had approximately Dividends. For the fiscal years ended September 30, Amount Paid Fiscal Year Date Declared Record Date Date Paid Per Share 2018 12/19/2017 12/29/2017 1/16/2018 $ 0.11 2018 2/12/2018 2/28/2018 3/16/2018 $ 0.11 2018 5/9/2018 5/31/2018 6/15/2018 $ 0.11 2018 8/13/2018 8/31/2018 9/14/2018 $ 0.15 2019 12/27/2018 1/7/2019 1/22/2019 $ 0.15 2019 2/12/2019 2/28/2019 3/14/2019 $ 0.15 2019 5/8/2019 5/31/2019 6/14/2019 $ 0.15 2019 8/7/2019 8/30/2019 9/13/2019 $ 0.15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This management’s discussion and analysis of financial condition and results of operations and other portions of this filing contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information. You should review the “Special Note Regarding Forward Looking Statements” and “Risk Factors” sections of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The following discussion should be read in conjunction with our financial statements and the related notes included elsewhere in this filing. Overview of Fiscal Revenue increased by approximately Our gross profit margin percentage decreased overall, from 20 We generated an operating On July 31, 2018, we completed the sale of all the outstanding stock of our Germany division of our TS segment. The one time gain recorded due to the sale of all the stock of Modcomp GmbH was approximately $16.8 million. No income taxes were provided as the transaction was a tax-free exchange in the U.K. The Modcomp GmbH’s results have been recorded as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations for all periods presented. The following table details our results of operations in dollars and as a percentage of sales for the fiscal years ended: % % September 30, 2019 of sales September 30, 2018 of sales (Dollar amounts in thousands) Sales $ 79,061 100 % $ 72,916 100 % Costs and expenses: Cost of sales 61,035 77 % 54,517 75 % Engineering and development 2,800 4 % 3,277 4 % Selling, general and administrative 16,052 20 % 16,723 23 % Total costs and expenses 79,887 101 % 74,517 102 % Operating loss (826) (1) % (1,601) (2) % Other income 384 — % 495 1 % Loss before income taxes (442) (1) % (1,106) (2) % Income tax (benefit) expense (71) — % 882 1 % Net loss from continuing operations (371) (1) % (1,988) (3) % Gain on sale of discontinued operations — — % 16,838 23 % Net loss from discontinued operations — — % (410) (1) % Total income from discontinued operations — — % 16,428 22 % Net (loss) income $ (371) (1) % $ 14,440 19 % Revenues Revenue increased by approximately TS segment revenue change by product and services lines for the fiscal years ended September 30 were as follows: Increase 2019 2018 $ % (Dollar amounts in thousands) Products $ 59,611 $ 52,647 $ 6,964 13 % Services 11,548 9,790 1,758 18 % Total $ 71,159 $ 62,437 $ 8,722 14 % The TS segment total revenue increased by approximately $8.7 million due to an increase of $11.5 million in 21 segment product revenue is attributed to HPP segment revenue change by product and services lines for the fiscal years ended September 30 were as follows: Decrease 2019 2018 $ % (Dollar amounts in thousands) Products $ 6,406 $ 7,014 $ (608) (9) % Services 1,496 3,465 (1,969) (57) % Total $ 7,902 $ 10,479 $ (2,577) (25) % The decrease in HPP product revenues for the period of $0.6 million was primarily the result of an approximately $1.5 million decrease in Myricom product line shipments, partially offset by an increase in Multicomputer product line shipments of approximately $0.9 million for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018. The decrease in HPP services revenues of approximately $2.0 million for the period was primarily the result of an approximately $1.7 million decrease in royalty revenues on high-speed processing boards related to the E2D program during the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018. Our total revenues by geographic area based on the location to which the products were shipped or services rendered were as follows: Increase (Decrease) 2019 % 2018 % $ % (Dollar amounts in thousands) Americas $ 72,522 92 % $ 60,458 83 % $ 12,064 20 % Europe 4,056 5 % 10,325 14 % (6,269) (61) % Asia 2,483 3 % 2,133 3 % 350 16 % Totals $ 79,061 100 % $ 72,916 100 % $ 6,145 8 % The Gross Margins Our gross margins 22 The following table summarizes 2019 2018 Increase (Decrease) (Dollar amounts in thousands) GM$ GM% GM$ GM% GM$ GM% TS $ 13,889 20 % $ 12,262 20 % $ 1,627 — % HPP 4,137 52 % 6,137 59 % (2,000) (7) % Total $ 18,026 23 % $ 18,399 25 % $ (373) (2) % The impact of product mix within our TS segment on gross margins for the fiscal years ended September 30 was as follows: 2019 2018 Increase GM$ GM% GM$ GM% GM$ GM% (Dollar amounts in thousands) Products $ 7,462 13 % $ 6,886 13 % $ 576 — % Services 6,427 56 % 5,376 55 % 1,051 1 % Total $ 13,889 20 % $ 12,262 20 % $ 1,627 — % The overall TS segment gross margin as a percentage of sales remained the same in fiscal year 2019 when compared to fiscal year 2018. The $0.6 million increase in our TS segment product gross margins resulted from an increase in product revenues in the U.S. division, partially offset by a decrease in the U.K division. The $1.1 million increase in the TS segment service gross margins primarily resulted from increased service revenues in the U.S. division. The impact of product mix on gross margins within our HPP segment for the fiscal years ended September 30 was as follows: 2019 2018 Increase (Decrease) (Dollar amounts in thousands) GM$ GM% GM$ GM% GM$ GM% Products $ 2,719 42 % $ 2,775 40 % $ (56) 2 % Services 1,418 95 % 3,362 97 % (1,944) (2) % Total $ 4,137 52 % $ 6,137 59 % $ (2,000) (7) % The overall HPP segment gross margins as a percentage of sales Engineering and Development Expenses The following table details our engineering and development expenses by operating segment for the fiscal years ended September 30, For the Year ended September 30, % of % of (Dollar amounts in thousands) 2019 Total 2018 Total $ Decrease % Decrease (Dollar amounts in thousands) By Operating Segment: TS $ — — % $ — — % $ — — % HPP 2,800 100 % 3,277 100 % (477) (15) % Total $ 2,800 100 % $ 3,277 100 % $ (477) (15) % Engineering and development expenses 23 ARIA SDS cyber security products. Selling, General and Administrative The following table details our selling, general and administrative (“SG&A”) expenses by operating segment for the years ended September 30, For the year ended September 30, % of % of $ Increase % Increase 2019 Total 2018 Total (Decrease) (Decrease) (Dollar amounts in thousands) By Operating Segment: TS segment $ 11,630 72 % $ 11,086 66 % $ 544 5 % HPP segment 4,422 28 % 5,637 34 % (1,215) (22) % Total $ 16,052 100 % $ 16,723 100 % $ (671) (4) % For fiscal year For fiscal year 2019 compared to fiscal year 2018, the HPP segment SG&A spending Other Income/Expenses The following table details our other income/expenses for the years ended September 30, For the year ended Increase September 30, 2019 September 30, 2018 (Decrease) (Amounts in thousands) Interest expense $ (99) $ (85) $ (14) Interest income 323 20 303 Foreign exchange gain (loss) 157 263 (106) Other income, net 3 297 (294) Total other income (expense), net $ 384 $ 495 $ (111) The decrease to other income (expenses) for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018 was primarily driven by a decrease in Other income, net of $0.3 million and a decrease of $0.1 million foreign exchange gain (loss), partially offset by an increase of $0.3 million in interest income. Income Taxes The Company recorded an income tax 24 a tax expense of approximately $588 thousand consisting of a reduction of the Company’s net deferred tax asset. The Company recorded tax expense of approximately $771 thousand related to the As of September 30, We Results of Discontinued Operations CSPi LTD, a wholly owned indirect subsidiary of the Company, sold all of the outstanding stock of Modcomp GmbH to Reply AG, an affiliate of Reply SpA, a holding company for a worldwide group of companies, on July 31, 2018 for $14.4 million cash, and recognized a gain of $16.8 million. The divestiture of CSPi’s German operations and our increased cash position will enable us to focus time and resources on our higher-margin and greater-potential growth opportunities. We are encouraged by the traction of our managed services business in the U.S. and we intend to continue to invest and focus on our new ARIA SDS cyber security products and to capitalize on the proliferation of our wireless service business. This divestiture of our German operations is another positive step toward our future growth. The following table is a summary of the operating results of the Germany division of our TS segment which have been reflected as discontinued operations. See Note 2 for additional information. For the year ended September 30, 2019 September 30, 2018 (Amounts in thousands) Revenues $ — $ 18,365 Net loss from discontinued operations, net of tax $ — $ (410) Liquidity and Capital Resources Our primary source of liquidity is our cash and cash equivalents, which Significant sources of cash for the year ended September 30, 25 Cash held by our foreign As of September 30, As of September 30, For more information, please refer to Note If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans, the equity markets, or other means. There is no assurance that we will be able to raise any such capital on terms acceptable to us, on a timely basis or at all. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition or continue to effectively operate our business. Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash generated from operations and availability on our lines of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for the foreseeable future. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, goodwill and intangibles, income taxes, deferred compensation, revenue recognition, retirement plans, restructuring costs and contingencies. We base our estimates on historical performance and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition; valuation allowances, specifically the allowance for doubtful accounts and net deferred tax asset valuation allowance; inventory valuation; intangibles; and pension and retirement plans. 26 Revenue Recognition Effective October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014‑09, Revenue We derive revenue from the sale of integrated hardware and software, third-party service contracts, professional services, We recognize revenue from We recognize revenue from Professional services generally include implementation, installation, and training services. Professional services are considered a series of distinct services that form one performance obligation and revenue is recognized over time as services are performed. Revenue generated from managed services is recognized over the term of the contract. Certain managed services contracts include financing of hardware and software. Revenues from arrangements which include financing are allocated considering relative standalone selling prices of lease and non-lease components within the agreement. The lease components include the hardware and software, which are subject to ASC 840. The non-lease component includes the managed services and is subject to ASC 606. Other services generally include revenue generated through our royalty, extended warranty, multicomputer repair, and maintenance contracts. Royalty revenue is sales-based and recognized on date of subsequent sale of the product, which occurs on the date of customer shipment. Revenue from extended warranty contracts is recognized evenly over the period of the warranty. Multicomputer repair services revenue is recognized upon control transfer when the customer takes possession of the computer at time of shipping. Revenue generated from maintenance services is recognized evenly over the term of the contract. Variable consideration is immaterial. Any products sold with right to return exists with the manufacturer. Managed service contracts contain the right to refund if canceled within 30 days of inception. Any products with a standard warranty are treated as a warranty obligation under ASC 460, The following policies are applicable to our major categories of segment revenue transactions: TS Segment Revenue TS Segment revenue is derived from the sale of hardware, software, professional services, third-party service contracts, maintenance contracts, managed services, and financing of hardware and software. Financing revenue is 27 recognized in accordance with ASC 840, Leases. Financing revenue is recorded in revenue as equipment leasing and is part of the Company’s operations. Third-party service contracts are evaluated to determine whether such service revenue should be recorded as gross sales or net and whether over time or at point in time. HPP Segment Revenue HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multicomputer and Myricom product lines. Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products functionality, and post contract maintenance and support. Significant Judgments The input method using labor hours expended relative to the total expected hours is used to recognize revenue for professional services. Only the hours that depict the Company’s performance toward satisfying a performance obligation are used for progress. An estimate for professional services is made at the beginning of each contract based on prior experience and monitored throughout the services. This method is most appropriate as it depicts the measure of progress towards satisfaction of the performance obligation. When product Contract Assets and Liabilities When the Company has performed work but does not have an unconditional right to payment, a contract asset is recorded. When the Company has the right to bill a customer, accounts receivable is recorded as an unconditional right exists. Contract liabilities arise when payment is received before the Company transfers a good or service to the customer. Contract Costs Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are less than a one-year period, are expensed as incurred, utilizing the practical expedient in ASC 340‑40‑25‑4. For a period greater than one year, incremental contract costs are capitalized if the Company expects to recover these costs. These costs are only capitalized if the contract is obtained. The costs are amortized over the contract term and expected renewal periods. The period of amortization is generally Costs to fulfill a contract are capitalized when 28 Other Projects are typically billed upon completion or at certain milestones. Product and Product Warranty Accrual Our product sales generally include a Engineering and Development Expenses Engineering and development expenses include payroll, employee benefits, stock-based compensation and other headcount-related expenses associated with product development. Engineering and development expenses also include third-party development and programming costs. We consider technological feasibility for our software products to be reached upon the release of the software, accordingly, no internal software development costs have been capitalized. Income Taxes We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment In addition, we are required to recognize in the consolidated financial statements, those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. In addition, the calculation of the 29 Intangible Assets Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if events or circumstances indicate that the asset may be impaired. We did not have intangible assets with indefinite lives at any time during the two years ended September 30, Inventories Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Pension and Retirement Plans The funded status of pension and other post-retirement benefit plans is recognized prospectively on the consolidated balance sheet. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive income, net of tax, until they are amortized as a component of net periodic pension/post-retirement benefits expense. Additionally, plan assets and obligations are measured as of our fiscal year-end balance sheet date (September 30). We have defined benefit and defined contribution plans in the U.K. Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets, expected compensation increases and applicable discount rates. Management has reviewed the discount rates and rates 30 The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets. Inflation and Changing Prices Management does not believe that inflation and changing prices had significant impact on sales, revenues or income during fiscal years The consolidated financial statements are included herein. Page Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Evaluation of Controls and Procedures Disclosure Controls and Procedures. The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, Management’s Report on Internal Control over Financial Reporting. The · pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company; · provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and the board of directors of a company; and · provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on its financial statements. Management has assessed the effectiveness of the Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls 32 may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This Annual Report on Form Changes in Internal Control over Financial Reporting. During the quarter ended September 30, Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance We incorporate the information required by this item by reference to the sections captioned “Nominees for Election”, “Our Board of Directors”, “Our Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our Schedule 14A Proxy Statement for our Item 11. We incorporate the information required by this item by reference to the sections captioned “Compensation of Executive Officers” and “Compensation of Non-Employee Directors” in our Schedule 14A Proxy Statement for our Item 12. Securities Authorized for Issuance Under Equity Compensation Plans. The equity compensation plans approved by our stockholders consist of the CSP, 33 table sets forth information as of September 30, (a) (1)(2) (b) (c) Number of securities remaining available for future Number of securities to be Weighted-average issuance under equity issued upon exercise of exercise price of outstanding compensation plans (excluding outstanding options, stock options, warrants and securities reflected in column Plan Category warrants and rights rights (a))(3) Equity compensation plans approved by security holders 192,735 $ 3.75 417,668 (1) Includes (2) Does not include purchase rights under the ESPP, as the purchase price and number of shares to be purchased under the ESPP are not determined until the end of the relevant purchase period. (3) Includes We incorporate additional information required by this Item by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in our Schedule 14A Proxy Statement for our Item 13. Certain Relationships and Related Transactions and Director Independence We incorporate the information required by this item by reference to the section captioned “Corporate Governance” in our Schedule 14A Proxy Statement for our Item 14. Principal Accountant Fees and Services We incorporate the information required by this item by reference to the sections captioned “Fees for Professional Services” and “Pre-approval Policies and Procedures” in our Schedule 14A Proxy Statement for our Item 15. Exhibits and Financial Statement Schedules (a) (1) Financial statements filed as part of this report: Consolidated Balance Sheets as of September 30, Consolidated Statements of Operations for the years ended September 30, Consolidated Statements of Comprehensive Income Consolidated Statements of Consolidated Statements of Cash Flows for the years ended September 30, 34 Notes to Consolidated Financial Statements (2) Financial statement schedules All other financial statements and schedules not listed have been omitted since the required information is included in the consolidated financial statements or the notes thereto included in Item 8, or is not applicable, material or required. (3) Exhibits Incorporated by Reference Exhibit Description Filed with Form Filing Date Exhibit 3.1 10‑K December 26, 2007 3.2 10‑K December 20, 2012 10.1 Form of Employee Invention and Non-Disclosure Agreement 10‑K November 22, 1996 10.2 10‑K December 29, 2008 10.3* DEF 14A March 30, 2007 B 10.4* 2014 Variable Compensation (Executive Bonus) and Base Programs dated November 12, 2013 10‑K December 23, 2014 10.5* 10‑K December 24, 2013 10.6* Form of Change of Control Agreement with Gary W. Levine dated January 11, 2008 10‑K December 23, 2010 10.7* DEF 14A January 6, 2014 A 10.8* DEF 14RA January 25, 2019 A 10.9 10‑K December 24, 2015 10.10 10‑K December 24, 2015 10.11* Executive Retention and Service Agreement with Victor Dellovo, dated September 4, 2012 10‑Q February 14, 2018 10.12* 10‑Q February 14, 2018 10.13 8‑K June 27, 2018 21.1 X 23.1 Consent of RSM LLP, Independent Registered Public Accounting Firm X 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1 X 101.INS XBRL Instance 101.SCH XBRL Taxonomy Schema 101.CAL XBRL Taxonomy Extension Calculation 101.DEF XBRL Taxonomy Extension Definition 35 101.LAB XBRL Taxonomy Extension Labels 101.PRE XBRL Taxonomy Extension Presentation *Management contract or compensatory plan. None. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CSP INC. By: /s/ Victor Dellovo Victor Dellovo Date: December Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/ Victor Dellovo Chief Executive Officer, President and Director December Victor Dellovo /s/ Gary W. Levine Chief Financial Officer December Gary W. Levine /s/ Mike Newbanks Vice President of Finance December Mike Newbanks /s/ C. Shelton James Director December C. Shelton James /s/ Raymond Charles Blackmon Director December Raymond Charles Blackmon /s/ Marilyn T. Smith Director December Marilyn T. Smith /s/ Izzy Azeri Director December Izzy Azeri 37 Report of Independent Registered Public Accounting Firm Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CSP Inc. and Subsidiaries (the “Company”) as of September 30, Basis for Opinion These financial statements are the responsibility of the We conducted our audits in accordance with the standards of the Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence /s/ RSM US LLP We have served as the Company’s auditor since 2007. Boston, Massachusetts December 10, 2019 38 CSP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value) September 30, September 30, 2019 2018 ASSETS Current assets: Cash and cash equivalents $ 18,099 $ 25,107 Accounts receivable, net of allowances of $138 and $87 15,114 11,980 Unbilled accounts receivable — 1,166 Investment in lease, net-current portion 367 246 Inventories 7,818 7,558 Refundable income taxes 487 480 Other current assets 4,649 1,878 Total current assets 46,534 48,415 Property, equipment and improvements, net 1,273 847 Other assets: Intangibles, net 37 48 Investment in lease, net-less current portion 417 564 Long term receivable 5,328 — Deferred income taxes 1,946 1,895 Cash surrender value of life insurance 3,718 3,441 Other assets 116 65 Total other assets 11,562 6,013 Total assets $ 59,369 $ 55,275 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 16,175 $ 9,277 Line of credit 2,459 3,247 Note payable - current portion 317 — Deferred revenue 741 1,197 Pension and retirement plans 335 340 Total current liabilities 20,027 14,061 Pension and retirement plans 6,904 6,168 Note payable - noncurrent portion 684 — Income taxes payable 694 709 Other noncurrent liabilities 632 535 Total liabilities 28,941 21,473 Commitments and contingencies Shareholders’ equity: Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,154 and 4,017 shares, respectively 42 40 Additional paid-in capital 15,733 14,661 Retained earnings 27,246 29,926 Accumulated other comprehensive loss (12,593) (10,825) Total shareholders’ equity 30,428 33,802 Total liabilities and shareholders’ equity $ 59,369 $ 55,275 See accompanying notes to consolidated financial statements. 39 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except for per share data) For the year ended September 30, September 30, 2019 2018 Sales: Product $ 66,017 $ 59,661 Services 13,044 13,255 Total sales 79,061 72,916 Cost of sales: Product 55,836 50,000 Services 5,199 4,517 Total cost of sales 61,035 54,517 Gross profit 18,026 18,399 Operating expenses: Engineering and development 2,800 3,277 Selling, general and administrative 16,052 16,723 Total operating expenses 18,852 20,000 Operating loss (826) (1,601) Other income (expense): Foreign exchange gain 157 263 Other income, net 227 232 Total other income 384 495 Loss before income taxes (442) (1,106) Income tax (benefit) expense (71) 882 Net loss from continuing operations (371) (1,988) Discontinued operations: Gain from sale of discontinued operations — 16,838 Loss from discontinued operations — (410) Net income from discontinued operations — 16,428 Net (loss) income $ (371) $ 14,440 Net (loss) income attributable to common stockholders $ (371) $ 13,842 Net loss from continuing operations per share – basic $ (0.09) $ (0.52) Gain per share from sale of discontinued operations - basic $ — $ 4.41 Net loss from discontinued operations per share – basic — (0.11) Total income per share of discontinued operations - basic $ — $ 4.30 Net (loss) income per share – basic $ (0.09) $ 3.62 Weighted average shares outstanding – basic 3,924 3,822 Net loss from continuing operations per share – diluted $ (0.09) $ (0.52) Gain per share from sale of discontinued operations - diluted $ — $ 4.32 Net loss from discontinued operations per share – diluted — (0.11) Total income per share of discontinued operations - diluted $ — $ 4.21 Net (loss) income per share – diluted $ (0.09) $ 3.55 Weighted average shares outstanding – diluted 3,924 3,901 See accompanying notes to consolidated financial statements. 40 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) For the Year Ended September 30, September 30, 2019 2018 Net (loss) income $ (371) $ 14,440 Other comprehensive income (loss): Unrealized actuarial (loss) gain on minimum pension liability, net of tax effect (1,003) 470 Foreign currency translation loss adjustments (765) (1,132) Other comprehensive loss (1,768) (662) Total comprehensive (loss) income $ (2,139) $ 13,778 See accompanying notes to consolidated financial statements. 41 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Amounts in thousands) Accumulated Additional other Total Paid-in Retained comprehensive Shareholders’ For the year ended September 30, 2018: Shares Amount Capital Earnings loss Equity Balance as of September 30, 2017 3,935 $ 40 $ 13,717 $ 17,407 $ (10,163) $ 21,001 Comprehensive income: Net income — — — 14,440 — 14,440 Other comprehensive loss — — — — (662) (662) Exercise of stock options 5 — 22 — — 22 Stock-based compensation — — 691 — — 691 Restricted stock cancellation — — — — — — Restricted stock issuance 54 — — — — — Issuance of shares under employee stock purchase plan 23 — 231 — — 231 Cash dividends paid on common stock ($0.48 per share) — — — (1,921) — (1,921) Balance as of September 30, 2018 4,017 $ 40 $ 14,661 $ 29,926 $ (10,825) $ 33,802 Accumulated Additional other Total Paid-in Retained comprehensive Shareholders’ For the year ended September 30, 2019: Shares Amount Capital Earnings loss Equity Balance as of September 30, 2018 4,017 $ 40 $ 14,661 $ 29,926 $ (10,825) $ 33,802 Comprehensive income: Adoption of ASU 2014-09 (see note 1) — — — 158 — 158 Net loss — — — (371) — (371) Other comprehensive loss — — — — (1,768) (1,768) Exercise of stock options 1 — 3 — — 3 Stock-based compensation — — 792 — — 792 Restricted stock cancellation (3) — — — — — Restricted stock issuance 108 1 — — — 1 Issuance of shares under employee stock purchase plan 31 1 277 — — 278 Cash dividends paid on common stock ($0.60 per share) — — — (2,467) — (2,467) Balance as of September 30, 2019 4,154 $ 42 $ 15,733 $ 27,246 $ (12,593) $ 30,428 See accompanying notes to consolidated financial statements. 42 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) For the year ended September 30, September 30, 2019 2018 Cash flows used in operating activities: Net loss from continuing operations $ (371) $ (1,988) Net income from discontinued operations — 16,428 Net (loss) income $ (371) $ 14,440 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 405 506 Amortization of intangibles 11 119 Loss on disposal of property, equipment and improvements — 4 Gain on sale of discontinued operations — (16,838) Foreign exchange gain (157) (263) Non-cash changes in accounts receivable 53 (38) Non-cash changes in inventories 503 555 Stock-based compensation expense on stock options and restricted stock awards 792 691 Deferred income taxes (209) 173 (Increase) decrease in cash surrender value of life insurance (134) 9 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (2,128) 5,191 Decrease (increase) in life insurance receivable 256 (256) Increase in inventories (777) (2,562) Decrease (increase) in refundable income taxes 585 (654) Increase in other assets and deferred costs (3,091) (522) Decrease (increase) in investment in lease 26 (810) Increase in long term receivable (5,328) — Increase (decrease) in accounts payable and accrued expenses 7,232 (2,538) Increase in deferred revenue (244) 262 Decrease in pension and retirement plans liabilities (353) (120) (Decrease) increase in income taxes payable (500) 464 (Decrease) increase in other long term liabilities 100 576 Net cash used in operating activities of continuing operations (3,329) (1,611) Net cash provided by operating activities of discontinued operations — 4,491 Net cash provided by (used in) operating activities (3,329) 2,880 Cash flows used in investing activities: Life insurance premiums paid (144) (150) Proceeds from sale of discontinued operations — 14,387 Purchases of property, equipment and improvements (832) (438) Net cash provided by (used in) investing activities of continuing operations (976) 13,799 Net cash used in investing activities of discontinued operations — (154) Net cash provided by (used in) investing activities (976) 13,645 Cash flows used in financing activities: Dividends paid (2,467) (1,921) Net borrowings under line-of-credit agreement (788) 137 Proceeds from debt 1,001 — Principal payments on capital leases (276) (70) Proceeds from issuance of shares under equity compensation plans 280 253 Net cash used in financing activities (2,250) (1,601) Effects of exchange rate on cash (453) (238) Net (decrease) increase in cash and cash equivalents (7,008) 14,686 Cash and cash equivalents beginning of period 25,107 10,421 Cash and cash equivalents at end of period $ 18,099 $ 25,107 Supplementary cash flow information: Cash paid for income taxes $ 52 $ 900 Cash paid for interest $ 68 $ 73 Supplementary non-cash financing and investing activities: Non-cash purchases of property and equipment $ 141 $ 865 See accompanying notes to consolidated financial statements. 43 CSP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Organization and Business CSP Inc. 1. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Foreign Currency Translation The U.S. Dollar is the reporting currency for all periods presented. The financial information for entities outside the United States is measured using the local currency as the functional currency. Assets and liabilities of the Cash Equivalents For purposes of the consolidated statements of cash flows, highly liquid investments with original maturities of three months or less at the time of acquisition are considered cash equivalents. Research and Development Expense For the years ended Impairment of Long-Lived Assets The Company reviews its long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management assesses the recoverability of the long-lived assets (other than goodwill) by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The amount of impairment, if any, is calculated based on the excess of the carrying amount over the fair value of those assets. Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if events or circumstances indicate that the asset may be impaired. We did not have intangible assets with indefinite lives at any time during the two years ended 44 also tested for recoverability whenever events or changes in circumstances indicate Investment in lease, net A lease receivable for equipment is recorded at lease inception, which includes future minimum lease payments at present value using the implicit interest rate, net of unearned interest income. Interest income is recognized on a monthly basis utilizing the effective-interest method. Interest income is recorded in revenue as equipment leasing is part of the Company’s central operations. Inventories Inventories are stated at the lower of cost or Property, Equipment and Improvements The components of property, equipment and improvements are stated at cost. The Company provides for depreciation by use of the straight-line method over the estimated useful lives of the related assets Trade Accounts Receivable, Long Term Receivable, and Allowance for Doubtful Accounts Trade accounts receivable are stated at amounts that have been billed to customers less an allowance for doubtful accounts. Allowances for doubtful accounts are recorded for the estimated losses resulting from the inability of our customers to make required payments. The estimates for the allowance for doubtful accounts are based on the length of time the receivables are past due, current business environment, and our historical experience. If the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. Accounts receivable are charged off against the reserve when management has determined they are uncollectible. Pension and Retirement Plans The funded status of pension and other postretirement benefit plans is recognized on the consolidated balance sheet. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been recognized through pension expense will be recognized in accumulated other comprehensive We have defined benefit and defined contribution plans in the United Kingdom (the “U.K.”) 45 employees and Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets, expected compensation increases and applicable discount rates. Management has reviewed the discount rates and rates of return with our consulting actuaries and investment advisor and concluded they were reasonable. A decrease in the expected return on pension assets would increase pension expense. Expected compensation increases are estimated based on historical and expected increases in the future. Increases in estimated compensation increases would result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit. A The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets. Segment Information We have two operating segments; (i) High Performance Products ("HPP") and (ii) Technology Solutions ("TS"). In the HPP segment, we design, manufacture and deliver products and services to customers that require specialized cyber security services, networking and signal Revenue Recognition Effective October 1, 2018, the Company adopted ASU No. 2014‑09, Revenue We derive revenue from the sale of integrated hardware and software, third-party service contracts, professional services, We recognize revenue from We recognize revenue from 46 to the third-party service provider or vendor is recorded as a reduction to revenue resulting in net sales equal to the gross profit on the transaction. Third-party service contracts are sold in different combinations with hardware, software, and services. We have determined the third-party services contracts are a single performance obligation in each sale. When the Company is an agent, revenue is typically recorded at a point in time. When the Company is the principal, revenue is recognized over the contract term. Professional services generally include implementation, installation, and training services. Professional services are considered a series of distinct services that form one performance obligation and revenue is recognized over time as services are performed. Revenue generated from managed services is recognized over the term of the contract. Certain managed services contracts include financing of hardware and software. Revenues from arrangements which include financing are allocated considering relative standalone selling prices of lease and non-lease components within the agreement. The lease components include the hardware and software, which are subject to ASC 840. The non-lease component includes the managed services and is subject to ASC 606. Other services generally include revenue generated through our royalty, extended warranty, multicomputer repair, and maintenance contracts. Royalty revenue is sales-based and recognized on date of subsequent sale of the product, which occurs on the date of customer shipment. Revenue from extended warranty contracts is recognized evenly over the period of the warranty. Multicomputer repair services revenue is recognized upon control transfer when the customer takes possession of the computer at time of shipping. Revenue generated from maintenance services is recognized evenly over the term of the contract. Variable consideration is immaterial. The right of return risk lies with the original manufacturer of the product. Managed service contracts contain the right to refund if canceled within 30 days of inception. Any products with a standard warranty are treated as a warranty obligation under ASC 460, The following policies are applicable to our major categories of segment revenue transactions: TS Segment Revenue TS Segment revenue is derived from the sale of hardware, software, professional services, third-party service contracts, maintenance contracts, managed services, and financing of hardware and software. Financing revenue is recognized in accordance with ASC 840, Leases. Financing revenue is recorded in revenue as equipment leasing and is part of the Company’s operations. Third-party service contracts are evaluated to determine whether such service revenue should be recorded as gross or net sales and whether over time or at point in time. HPP Segment Revenue HPP segment revenue is derived from the sale of integrated hardware and software, maintenance, and other services through the Multicomputer and Myricom product lines. Myricom revenue is derived from the sale of products, which are comprised of both hardware and embedded software which is essential to the products functionality, and post contract maintenance and support. 47 See disaggregated revenues below by products/services and geography. Technology Solutions Segment High Performance Products United Consolidated For the year ended September 30, Segment Kingdom U.S. Total Total (Amounts in thousands) 2019 Sales: Product $ $ $ $ $ Service Finance * — — Total sales $ $ $ $ $ * Finance revenue is related to equipment leasing and is not subject to the guidance on revenue from contracts with customers (ASC 606). Significant Judgments The input method using labor hours expended relative to the total expected hours is used to recognize revenue for professional services. Only the hours that depict the Company’s performance toward satisfying a performance obligation are used for progress. An estimate for professional services is made at the beginning of each contract based on prior experience and monitored throughout the services. This method is most appropriate as it depicts the measure of progress towards satisfaction of the performance obligation. When product Contract Assets and When the Company has performed work but does not have an unconditional right to payment, a contract asset is Contract liabilities arise when payment is received before the Company transfers a good or service to the Contract Costs Incremental costs of obtaining a contract involving customer transactions where the revenue and the related transfer of goods and services are less than a one-year period, are expensed as incurred, utilizing the practical expedient in ASC 340‑40‑25‑4. For a period greater than one year, incremental contract costs are capitalized if the Company 48 expects to recover these costs. These costs are only capitalized if the contract is obtained. The costs are amortized over the contract term and expected renewal periods. The period of amortization is generally three to six years. Incremental costs are related to commissions in the TS portion of the business. Current capitalized contract costs are within the account other current assets on the consolidated balance sheets for the periods ended September 30, 2019 and September 30, 2018. The portion of current capitalized costs was $85 thousand and $71 thousand as of September 30, 2019 and October 1, 2018, respectively. There are no non-current capitalized costs on the consolidated balance sheets. The amount of incremental costs amortized for the year ended September 30, 2019 was $235 thousand, which is recorded in selling, general, and administrative expenses. There was no impairment related to incremental costs capitalized during the year ended September 30, 2019. Costs to fulfill a contract are capitalized when the costs are related to a contract or Other Projects are typically billed upon completion or at certain milestones. Product and services are typically billed when shipped or as services are being performed. Payment terms are typically 30 days to pay in full except in Europe where it could be up to 90 days. Most of the The Company has certain contracts that have an original term of more than one year. The royalty agreement is longer than one year and managed service (Amounts in thousands) Fiscal 2020 $ Fiscal 2021 Fiscal 2022 Fiscal 2023 $ Product Warranty Accrual Our product sales generally include a hardware warranty which ranges from 49 Engineering and Development Expenses Engineering and development expenses include payroll, employee benefits, stock-based compensation and other headcount-related expenses associated with product development. Engineering and development expenses also include third-party development and programming costs. We consider technological feasibility for our software products to be reached upon the release of the software, accordingly, no internal software development costs have been capitalized. Income Taxes We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using In addition, we are required to recognize in the consolidated financial statements, those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. In addition, the calculation of the Earnings per Share of Common Stock Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income by the assumed weighted average number of common shares outstanding. We are required to present earnings per share 50 Basic and diluted earnings per share computations for the For the years ended September 30, 2019 September 30, 2018 (Amounts in thousands except per share data) Loss from continuing operations $ (371) $ (1,988) Gain from sale of discontinued operations — 16,838 Loss from discontinued operations — (410) Total income from discontinued operations — 16,428 Net (loss) income (371) 14,440 Less: net income attributable to nonvested common stock — 598 Net (loss) income attributable to common stockholders $ (371) $ 13,842 Weighted average total shares outstanding – basic 3,924 3,987 Less: weighted average non–vested shares outstanding — 165 Weighted average number of common shares outstanding – basic 3,924 3,822 Potential common shares from non–vested stock awards and the assumed exercise of stock options — 79 Weighted average common shares outstanding – diluted 3,924 3,901 Net loss from continuing operations per share – basic $ (0.09) $ (0.52) Net income from discontinued operations per share – basic $ — $ 4.30 Net (loss) income share – basic $ (0.09) $ 3.62 Net (loss) from continuing operations per share – diluted $ (0.09) $ (0.52) Net income from discontinued operations per share – diluted $ — $ 4.21 Net (loss) income per share – diluted $ (0.09) $ 3.55 All anti-dilutive securities, including stock options, are excluded from the diluted income per share computation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues Stock-Based Compensation We measure and recognize compensation expense for all stock-based payment awards made to employees and directors including stock options and nonvested shares of restricted common stock based on estimated fair values of stock-based payment awards on the date of grant. The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock option grants. The fair value of nonvested restricted share awards is equal to the quoted market price of our common stock as quoted on the Nasdaq Global Market on the date of grant. The fair value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Because stock-based compensation expense recognized in the consolidated statements of operations for the fiscal years ended September 30, 51 estimated forfeitures and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized for the fiscal years ended September 30, Concentrations of Credit Risk Cash and cash equivalents are maintained with several financial institutions in the U.S. Subsequent Events The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the statement of financial position, including the estimates inherent in the process of preparing financial statements. The Company has evaluated subsequent events through the date of this filing. Accounting In May 2014, the 52 The effects of Year ended September 30, 2019 (Amounts in thousands, except per share amounts) Balances Effect of without change As adoption of Higher/ Reported ASC 606 (Lower) Total sales $ 79,061 $ 78,563 $ 498 Total cost of sales 61,035 60,567 468 Gross profit 18,026 17,996 30 Operating loss (826) (856) 30 Income tax benefit (71) (76) 5 Net loss (371) (396) 25 Net loss attributable to common stockholders $ (371) $ (396) $ 25 Basic earnings per share $ (0.09) $ (0.10) $ 0.01 Diluted earnings per share $ (0.09) $ (0.10) $ 0.01 As of September 30, 2019 (Amounts in thousands) Balances Effect of without change As adoption of Higher/ Reported ASC 606 (Lower) Assets: Accounts receivable $ 15,114 $ 14,929 $ 185 Unbilled accounts receivable — 565 (565) Inventories 7,818 8,484 (666) Other current assets 4,649 4,069 580 Deferred tax asset 1,946 2,000 (54) Liabilities: Deferred revenue $ 741 $ 1,444 $ (703) Shareholders' Equity: Retained Earnings $ 27,246 $ 27,063 $ 183 In In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, an amendment of the FASB Accounting Standards Codification. This ASU will reduce diversity in practice for classifying cash payments and receipts in the statement of cash flows for a number of common transactions. It will also clarify when identifiable cash flows should be separated versus classified based on their predominant source or use. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new standard was adopted by the Company In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, an amendment of the FASB Accounting Standards Codification. This ASU requires the seller and buyer to recognize at the transaction date the current and deferred income tax consequences of intercompany asset transfers (except transfers of 53 inventory). Under current GAAP, the seller and buyer defer the consolidated tax consequences of an intercompany asset transfer from the period of the transfer to a future period when the asset is transferred out of the consolidated group, or otherwise affects consolidated earnings. This standard will cause volatility in companies’ effective tax rates, particularly for those that transfer intangible assets to foreign subsidiaries. For public entities, the new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. An entity may early adopt the standard but only at the beginning of an annual period for which it has not issued or made available for issuance financial statements (interim or In January 2017, FASB issued ASU No. 2017-01, In March 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, an amendment of the FASB Accounting Standards Codification. This ASU requires employers that sponsor defined benefit pension and/or other post-retirement benefit plans to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Employers are required to present the other components of net benefit costs in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component of net periodic pension cost will be eligible for asset capitalization. For public entities, the new standard is effective for annual periods beginning after December 15, 2017, including interim periods within that annual period. New accounting standards not adopted as of September 30, 2019 In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842), an amendment of the FASB Accounting Standards Codification. This ASU requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for the Company on October 1, 2019. The standard mandates a modified retrospective transition method for all entities and early adoption is In June 2016, the FASB issued ASU 2016‑13, Financial Instruments-Credit Losses (Topic 326), an amendment of the FASB Accounting Standards Codification. This ASU will change how entities account for credit losses for most financial assets and certain other instruments. For trade receivables, loans and held-to-maturity debt securities entities will be required to estimate lifetime expected credit losses. For available-for-sale debt securities entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. Additionally, there will be a significant increase in the amount of disclosures by year of origination for certain financing receivables. For public entities, the new standard is effective for annual periods beginning after December 15, 2019, including interim periods within that annual period. The Company is evaluating the effect that ASU 2016‑13 will have on its consolidated financial statements and related disclosures. 54 In February 2018, the FASB issued ASU 2018‑02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect that ASU 2018‑02 will have on its consolidated financial statements and related disclosures. In June 2018, the FASB issued ASU No. 2018‑07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, an amendment of the FASB Accounting Standards Codification. Under this ASU companies will no longer be required to value non-employee awards differently from employee awards, but the accounting remains different for attribution and a contractual term election for valuing nonemployee equity share options. Equity-classified awards to nonemployees will now be measured at the grant date using fair value of the equity instruments the company is obligated to issue and recognition is associated with the probable outcome. Awards are subsequently measured using stock compensation guidance unless they are modified after the nonemployee stops providing goods or services. Existing disclosure requirements within the stock compensation guidance also apply to nonemployee awards. For public entities, the new standard is effective for annual periods beginning after December 15, 2018, including interim periods within that fiscal year. The Company is evaluating the effect that ASU 2018‑07 will have on its consolidated financial statements and related disclosures. In August 2018, the FASB issued ASU No. 2018‑14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715‑20), Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, an amendment of the FASB Accounting Standards Codification. Under this ASU existing disclosures not considered cost beneficial are removed, disclosures identified as relevant are added, and there is added clarification regarding specific existing disclosures. For public entities, the new standard is effective for annual periods beginning after December 15, 2020. The Company is evaluating the effect that ASU 2018‑14 will have on its consolidated financial statements and related disclosures. 2. On July 31, 2018, CSPi LTD, a wholly owned indirect subsidiary of the Company, completed its sale of all of the outstanding stock of Modcomp GmbH, to Reply AG, an affiliate of Reply SpA, a holding company for a worldwide group of companies, pursuant to the terms of a Share Purchase and Assignment Agreement dated June 27, 2018. Modcomp GmbH, dba CSPI GmbH, through itself and its wholly owned subsidiaries, provided managed security services to customers primarily in Germany. Upon the closing of the Share Purchase Agreement, Reply AG paid to CSPI total cash at closing of approximately $14.4 million, which consisted of the original purchase price of $11.7 million plus an adjustment at closing for Net Cash (as defined in the Share Purchase Agreement) of approximately $2.7 million. An additional €400 thousand is included in escrow and will be recorded if and when received by the Company. Accordingly, CSPi determined that the assets and liabilities of this reportable segment met the discontinued operations criteria in U.S. GAAP in the year ended September 30, 2018. The gain recorded due to the sale of all the stock of Modcomp GmbH was approximately $16.8 million. No income taxes were provided as the transaction was a tax-free exchange in the U.K. As such, Modcomp GmbH’s results have been recorded as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations for all periods presented. 55 Summarized Discontinued Operations Financial Information As the sale of the subsidiary occurred prior to September 30, 2018 there were no assets or liabilities of discontinued operations in the accompanying consolidated balance sheets for the years ended September 30, 2019 and 2018. The following table summarizes the results of discontinued operations for the years ended September 30, 2019, and 2018. For the year ended September 30, September 30, 2019 2018 Sales $ — $ 18,365 Cost of sales — 15,843 Gross profit — 2,522 Selling, general and administrative expenses — 2,837 Operating loss — (315) Other expenses — (95) Loss before income taxes — (410) Income tax expense — — Loss from discontinued operations $ — $ (410) Gain from sale of discontinued operations — 16,838 Total income from discontinued operations $ — $ 16,428 3. Accounts and Long Term Receivable Within accounts receivable and long term receivable there are amounts due reflecting sales whose payment terms exceed one year. This financing is separate from agreements with a leasing component, see Note 4 for financing through leases. These receivables are included in Accounts Receivable and Long Term Receivable in the amount of $2.1 million and $5.0 million as of September 30, 2019. The long-term receivable carries a weighted interest rate of 6.9%, which reflects the approximate interest rate consistent with a separate financing transaction with the customer. The Company did not finance any sales of hardware, software, or services in fiscal year 2018, except for agreements containing a lease which is described in Note 4. There is not an allowance for credit losses nor impairments for accounts and long term receivables with a contractual maturity of over one year. There was also no activity in the allowance for credit losses of these receivables for the year ended September 30, 2019. All these agreements are looked at as one portfolio in determining credit losses. There are various factors that are considered in extending a customer payment terms longer than one year including payment history, economic conditions, and capacity to pay. The credit quality of customers is monitored by payment activity. The unearned income represents a rate similar to market. Contractual maturities of outstanding financing with an original contractual maturity over one year are as follows: Fiscal year ending September 30: (Amounts in thousands) 2020 $ 2,502 2021 2,258 2022 1,880 2023 1,423 Total payments 8,063 Less: unearned income 976 Total, net of unearned income $ 7,087 56 The current portion of $2.1 million is within accounts receivable. Total long term receivable was $5.3 million at September 30, 2019, which included $5.0 million from financing and $0.3 million that did not have a financing component. The $0.3 million was recorded as the contract it relates to is noncancelable. 4. Investment in Lease Investment in Lease, net The Company enters into certain agreements where it supplies equipment to be used in a customer’s IT infrastructure in conjunction with the Company providing managed services. Agreements contain a lease because the customer has a right to use the equipment for a stated period of time. The leases are either a direct-financing or sales-type. At lease inception a lease receivable is recorded, which includes future minimum lease payments at present value using the implicit interest rate. Interest income is recognized on a monthly basis utilizing the effective-interest method. Interest income from leases is recorded in revenue as equipment leasing is part of the Company’s central operations. A summary of components for the Company’s investment in lease, net is as follows: September 30, 2019 September 30, 2018 (Amounts in thousands) Investment in lease, gross $ 889 $ 1,038 Unearned income (105) (228) Total investment in lease, net $ 784 $ 810 Current portion $ 367 $ 246 Noncurrent portion $ 417 $ 564 The schedule of future minimum lease payments receivable is as follows: Fiscal year ending September 30: (Amounts in thousands) 2020 $ 451 2021 356 2022 67 2023 12 2024 3 Minimum lease payments including interest $ 889 Amount representing interest (105) Minimum lease payments excluding interest $ 784 5. Inventories Inventories consist of the following: September 30, September 30, 2019 2018 (Amounts in thousands) Raw materials $ 671 $ 1,098 Work-in-process 93 226 Finished goods 7,054 6,234 Total $ 7,818 $ 7,558 57 Table of 6. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows: Effect of Accumulated Foreign Minimum Other Currency Pension Comprehensive Translation Liability Loss (Amounts in thousands) Balance as of September 30, 2017 $ (3,214) $ (6,949) $ (10,163) Change in period (1,132) 475 (657) Tax effect of change in period — (5) (5) Balance as of September 30, 2018 $ (4,346) $ (6,479) $ (10,825) Change in period (765) (1,063) (1,828) Tax effect of change in period — 60 60 Balance as of September 30, 2019 $ (5,111) $ (7,482) $ (12,593) The changes in the minimum pension liability are net of amortization of net 7. Income Taxes The components of income before income tax and income tax (benefit) expense are comprised of the following: For the Years Ended September 30, 2019 2018 (Amounts in thousands) Income before income tax: U.S. $ (663) $ (1,077) Foreign 221 (29) $ (442) $ (1,106) Income tax (benefit) expense: Current: Federal $ (141) $ 771 State 122 47 Foreign — — (19) 818 Deferred: Federal (73) 259 State 21 (118) Foreign — (77) (52) 64 $ (71) $ 882 As of September 30, 58 asset realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are reduced, or if objective negative evidence in the form of cumulative The recording and ultimate reversal of valuation allowances for our deferred tax asset requires significant judgment associated with past and projected performance. In assessing the realizability of deferred tax assets, we consider our taxable future earnings and the expected timing of the reversal of temporary differences. We recorded a valuation allowance which reduced the gross deferred tax asset to an amount that we believed was more likely than not to be realized because of the cumulative losses incurred in the U.K. in recent years, which represented sufficient negative evidence to record a valuation allowance against certain deferred tax assets. We continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative Reconciliation of federal statutory rate and income tax expense to the For the Years Ended September 30, 2019 2018 (Dollar amounts in thousands) Computed “expected” tax benefit $ (93) 21.0 % $ (269) 24.3 % Increases (reductions) in taxes resulting from: State income taxes, net of federal tax benefit (73) 16.5 % (107) 9.7 % Foreign operations (46) 10.4 % (70) 6.3 % Permanent differences 31 (7.0) % (14) 1.3 % Change in valuation allowance 235 (53.2) % 118 (10.7) % Deferred revenue (48) 10.9 % — — % Impact of 965 one-time transition tax — — % 771 (69.7) % Federal tax rate change — — % 588 (53.2) % Payable true up 17 (3.8) % — — % Uncertain tax liability adjustment (41) 9.3 % 11 (1.0) % Research & development credit (90) 20.4 % (125) 11.3 % Other items 37 (8.4) % (21) 2.0 % Income tax (benefit) expense $ (71) 16.1 % $ 882 (79.7) % 59 For the years ended September 30, September 30, September 30, 2019 2018 (Amounts in thousands) Deferred tax assets: Pension $ 1,378 $ 1,390 Intangibles 81 104 Other reserves and accruals 291 451 Inventory reserves and other 619 502 State credits, net of federal benefit 380 380 Federal and state net operating loss carryforwards 928 626 Foreign net operating loss carryforwards 1,393 1,489 Foreign exchange on intercompany loan 7 7 Depreciation and amortization (232) (396) Gross deferred tax assets 4,845 4,553 Less: valuation allowance (2,899) (2,658) Realizable deferred tax asset 1,946 1,895 Gross deferred tax liabilities — — Net deferred tax assets $ 1,946 $ 1,895 The deferred tax valuation allowance In December 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was enacted. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, expanding the tax base and imposing a tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company has recognized the impact of the Tax Reform Act in these consolidated financial statements and related disclosures in 2018. The impact of the remeasurement of the Company’s US deferred tax assets and liabilities to 21% resulted in a tax expense of approximately $0.6 million consisting of a reduction of the Company’s net deferred tax asset. The Company recorded tax expense of approximately $0.8 million related to the deemed repatriation tax. The Company’s used a blended U.S. statutory tax rate for fiscal 2018 of 24.28% and in fiscal 2019 the corporate tax rate was 21%. As of September 30, 60 with no expiration. The Company had U.S. net operating loss carryforwards for state purposes of approximately $4.8 million and $2.0 million, respectively, which are available to offset future taxable income through As of September 30, As of September 30, As of September 30, Undistributed earnings of the Company's foreign subsidiaries amounted to approximately In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex 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. As of September 30, A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: For the Year Ended For the Year Ended September 30, 2019 September 30, 2018 (Amounts in thousands) Balance, beginning of year $ 220 $ 209 Accrued penalties and interest 13 11 Reversal for statute of limitations (233) — Balance, end of period $ — $ 220 We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company has reviewed the tax positions taken on returns filed domestically and in its foreign jurisdictions for all open years, generally fiscal 61 8. Property, Equipment and Improvements, Net Property, equipment and improvements, net consist of the following: September 30, September 30, 2019 2018 (Amounts in thousands) Leasehold improvements $ 224 $ 224 Equipment 8,397 7,574 Automobiles 98 101 8,719 7,899 Less accumulated depreciation and amortization (7,446) (7,052) Property, equipment and improvements, net $ 1,273 $ 847 The Company uses the straight-line method over the estimated useful lives of the assets to record depreciation expense. Depreciation expense was 9 As of September 30, September 30, 2019 September 30, 2018 Weighted Weighted Average Average Remaining Remaining Amortization Accumulated Amortization Accumulated Period Gross Amortization Net Period Gross Amortization Net (Amounts in thousands) Customer list 5 years $ 910 $ 873 $ 37 6 years $ 910 $ 864 $ 46 Non-compete agreements 0 years 93 93 — 0 years 93 93 — Developed technology 0 years 30 $ 30 $ — 0 years 30 $ 30 $ — Trade name 0 years 140 $ 140 $ — 0 years 140 $ 138 $ 2 Total $ 1,173 $ 1,136 $ 37 $ 1,173 $ 1,125 $ 48 Amortization expense on these intangible assets was Annual amortization expense related to intangible assets for each of the following successive fiscal years is as follows: Fiscal year ending September 30: (Amounts in thousands) 2020 9 2021 9 2022 9 2023 9 2024 1 Total $ 37 62 10. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: September 30, 2019 2018 (Amounts in thousands) Accounts payable $ 13,495 $ 4,466 Commissions 359 312 Compensation and fringe benefits 992 1,836 Professional fees and shareholders’ reporting costs 369 308 Taxes, other than income 353 313 Warranty 105 108 Other 502 1,934 $ 16,175 $ 9,277 11. Note Payable In September 2019, the Company borrowed $1.0 million with a 5.0% rate of interest related to a multi-year agreement with a customer (see Note 3 for the disclosure related to the receivable). Payments are due each month and maturities are outlined in the tables below. Fiscal year ending September 30: (Amounts in thousands) 2020 $ 359 2021 359 2022 359 Total 1,077 Less: note discount 76 Total $ 1,001 As of September 30, 2019 (Amounts in thousands) Current $ 359 Less: note discount 42 Note payable - current portion $ 317 Noncurrent $ 718 Less: note discount 34 Note payable - noncurrent portion $ 684 12. Product Warranties Product warranty activity for the years ended September 30 was as follows: 2019 2018 Balance at the beginning of the period $ 107,538 $ 121,450 Accruals for warranties for products sold in the period 34,207 26,539 Fulfillment of warranty obligations (37,007) (40,451) Balance at the end of the period $ 104,738 $ 107,538 These amounts are within accounts payable and accrued expenses on the consolidated balance sheets. 63 13. Stock Based Incentive Compensation In 2015, the Company adopted the 2015 Stock Incentive Plan (the Awards issued under any of the stock option plans are not affected by termination of the plan. The Company issues stock options at their fair market value on the date of grant. Vesting of stock options granted pursuant to the We measure and recognize compensation expense for all stock-based payment awards made to employees and directors including employee stock options and awards of nonvested stock based on estimated fair values, as described in Note 1. Stock-based compensation expense incurred and recognized for the years ended September 30, The following table summarizes stock-based compensation expense in the Years Ended September 30, September 30, 2019 2018 (Amounts in thousands) Cost of sales $ 7 $ 5 Engineering and development 49 32 Selling, general and administrative 736 654 Total $ 792 $ 691 For the year ended September 30, The Company measures the fair value of nonvested stock awards based upon the market price of its common stock as of the date of grant. The Company used the Black-Scholes option-pricing model to value stock options. The Black-Scholes model requires the use of a number of assumptions including volatility of the 64 As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, expense for grants beginning upon adoption on October 1, 2005 has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rates for the years ended September 30, No cash was used to settle equity instruments granted under share-base payment arrangements in any of the years in the two-year period ended September 30, The following tables provide summary data of stock option award activity: Weighted Weighted Average Aggregate average Remaining Intrinsic Number exercise Contractual Value of Shares price Term (in thousands) Outstanding at September 30, 2017 9,376 4.49 — — Granted — $ — — — Expired (1,250) 6.82 — — Forfeited — — — — Exercised (4,626) 4.67 — — Outstanding at September 30, 2018 3,500 $ 3.42 — — Granted — — — — Expired (500) $ 2.99 — — Forfeited — — — — Exercised (1,000) 2.99 — — Outstanding at September 30, 2019 2,000 $ 3.75 .98 Years $ 19 Exercisable at September 30, 2019 2,000 $ 3.75 .98 Years $ 19 Vested and expected to vest at September 30, 2019 2,000 $ 3.75 .98 Years $ 19 There were no stock options granted in the years ended September 30, Weighted Weighted Average Average Aggregate Number of grant date Remaining Intrinsic nonvested Fair Contractual Value shares Value Term (in thousands) Nonvested shares outstanding at September 30, 2017 179,821 $ 8.64 2.23 Years $ 1,987 Activity in 2018: Granted 72,000 $ 11.83 — — Vested (80,969) $ 8.18 — — Forfeited (16,500) $ 8.90 — — Nonvested shares outstanding at September 30, 2018 154,352 $ 10.34 2.11 Years $ 2,025 Activity in 2019: Granted 108,000 $ 9.98 — — Vested (68,867) $ 10.39 — — Forfeited (2,750) $ 8.91 — — Nonvested shares outstanding at September 30, 2019 190,735 $ 10.12 2.21 Years $ 2,560 Vested at September 30, 2019 400,700 $ 7.17 0.20 Years $ 5,377 Vested and expected to vest at September 30, 2019 591,435 $ 8.12 0.85 Years $ 7,937 65 As of September 30, 14. Employee Stock Purchase Plan In December 2013, the Board of Directors of the Company adopted the 2014 Employee Stock Purchase Plan covering up to 250,000 shares of Common Stock (the 15. Pension and Retirement Plans We have defined benefit and defined contribution plans in the U.K. Defined Benefit Plans The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheet. The domestic supplemental retirement plans have life insurance policies which are not considered plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. These insurance policies are included in the balance sheet at their cash surrender value, net of policy loans, aggregating 66 Assumptions: The following table provides the weighted average actuarial assumptions used to determine the actuarial present value of projected benefit obligations at: Domestic International September 30, September 30, 2019 2018 2019 2018 Discount rate: 3.00 % 4.00 % 1.90 % 2.90 % Expected return on plan assets: 3.40 % 3.80 % Rate of compensation increase: — % — % The following table provides the weighted average actuarial assumptions used to determine net periodic benefit cost for years ended: Domestic International September 30, September 30, 2019 2018 2019 2018 Discount rate: 4.00 % 3.75 % 1.90 % 2.80 % Expected return on plan assets: 3.40 % 3.70 % Rate of compensation increase: — % — % For domestic plans, the discount rate was determined by comparison against the The periodic benefit cost and the actuarial present value of projected benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The Company revises these assumptions based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement benefits. 67 The components of net periodic benefit costs related to the U.S. and international plans are as follows: Year Ended September 30, 2019 2018 U.K. U.S. Total U.K. U.S. Total (Amounts in thousands) Pension: Interest cost $ 362 $ 24 $ 386 $ 370 $ 25 $ 395 Expected return on plan assets (327) — (327) (312) — (312) Amortization of net gain (loss) 149 (3) 146 170 (1) 169 Net periodic benefit cost $ 184 $ 21 $ 205 $ 228 $ 24 $ 252 Post Retirement: Service cost $ — $ 34 $ 34 $ — $ 40 $ 40 Interest cost — 53 53 — 47 47 Amortization of net loss — (20) (20) — (18) (18) Net periodic cost $ — $ 67 $ 67 $ — $ 69 $ 69 Pension: Decrease in minimum liability included in other comprehensive income (loss) $ 914 18 $ 932 $ (462) $ (7) $ (469) Post Retirement: Decrease in minimum liability included in other comprehensive income (loss) — 131 131 — (6) (6) Total: Decrease in minimum liability included in comprehensive income (loss) $ 914 $ 149 $ 1,063 $ (462) $ (13) $ (475) 68 The following table presents an analysis of the changes in Years Ended September 30 2019 2018 Foreign U.S. Total Foreign U.S. Total (Amounts in thousands) Pension: Change in projected benefit obligation (“PBO”) Balance beginning of year $ 12,874 $ 585 $ 13,459 $ 13,285 $ 677 $ 13,962 Service cost — — — — — — Interest cost 362 24 386 370 25 395 Changes in actuarial assumptions 1,273 15 1,288 (165) (7) (172) Foreign exchange impact (772) — (772) (364) — (364) Benefits paid (290) (110) (400) (252) (110) (362) Projected benefit obligation at end of year $ 13,447 $ 514 $ 13,961 $ 12,874 $ 585 $ 13,459 Changes in fair value of plan assets: Fair value of plan assets at beginning of year $ 8,270 $ — $ 8,270 $ 8,239 $ — $ 8,239 Actual gain on plan assets 194 — 194 291 — 291 Company contributions 545 110 655 227 110 337 Foreign exchange impact (481) — (481) (235) — (235) Benefits paid (290) (110) (400) (252) (110) (362) Fair value of plan assets at end of year $ 8,238 $ — $ 8,238 $ 8,270 — $ 8,270 Funded status \ net amount recognized $ (5,209) $ (514) $ (5,723) $ (4,604) $ (585) $ (5,189) Post Retirement: Change in projected benefit obligation (“PBO”): Balance beginning of year $ — $ 1,318 $ 1,318 $ — $ 1,255 $ 1,255 Service cost — 34 34 — 40 40 Interest cost — 53 53 — 47 47 Changes in actuarial assumptions — 111 111 — (24) (24) Projected benefit obligation at end of year $ — $ 1,516 $ 1,516 $ — $ 1,318 $ 1,318 Funded status \ net amount recognized $ — $ (1,516) $ (1,516) $ — $ (1,318) $ (1,318) 69 The amounts recognized in the consolidated balance sheet consist of: Years Ended September 30 2019 2018 Foreign U.S. Total Foreign U.S. Total (Amounts in thousands) Pension: Accrued benefit liability $ (5,209) $ (514) $ (5,723) $ (4,604) $ (585) $ (5,189) Deferred tax — 15 15 (1) 22 21 Accumulated other comprehensive income 6,165 24 6,189 5,251 13 5,264 Net amount recognized $ 956 $ (475) $ 481 $ 646 $ (550) $ 96 Post Retirement: Accrued benefit liability $ — $ (1,516) $ (1,516) $ — $ (1,320) $ (1,320) Deferred tax — 41 41 — 93 93 Accumulated other comprehensive income (loss) — 113 113 — 34 34 Net amount recognized $ — $ (1,362) $ (1,362) $ — $ (1,193) $ (1,193) Total pension and post retirement: Accrued benefit liability $ (5,209) $ (2,030) $ (7,239) $ (4,604) $ (1,904) $ (6,508) Deferred tax — 56 56 (1) 115 114 Accumulated other comprehensive income 6,165 137 6,302 5,251 47 5,298 Net amount recognized $ 956 $ (1,837) $ (881) $ 646 $ (1,742) $ (1,096) Accumulated Benefit Obligation: Pension $ (13,447) $ (514) $ (13,961) $ (12,874) $ (585) $ (13,459) Post Retirement — (1,516) (1,516) — (1,320) (1,320) Total accumulated benefit obligation $ (13,447) $ (2,030) $ (15,477) $ (12,874) $ (1,905) $ (14,779) Plans with projected benefit obligations in excess of plan assets are attributable to unfunded domestic supplemental retirement plans, Accrued benefit liability reported as: September 30, 2019 2018 (Amounts in thousands) Current accrued benefit liability $ 335 $ 340 Non-current accrued benefit liability 6,904 6,168 Total accrued benefit liability $ 7,239 $ 6,508 As of September 30, The amount of net deferred Contributions The Company expects to contribute 70 Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (amounts in thousands): Fiscal year ending September 30: (Amounts in thousands) 2020 $ 401 2021 $ 408 2022 $ 441 2023 $ 475 2024 $ 514 Thereafter $ 843 Plan Assets At September 30, The fair value of the assets held by the U.K. pension plan by asset category are as follows: Fair Values as of September 30, 2019 September 30, 2018 Fair Value Measurements Using Inputs Considered as Fair Value Measurements Using Inputs Considered as Asset Category Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 (Amounts in thousands) Cash on deposit $ 279 $ 279 $ — $ — $ 36 $ 36 $ — $ — Pooled funds 7,959 7,959 — — 8,234 8,234 — — Total plan assets $ 8,238 $ 8,238 $ — $ — $ 8,270 $ 8,270 $ — $ — The expected long-term rates of return on plan assets are equal to the yields to maturity of appropriate indices for government and corporate bonds and by adding a premium to the government bond return for equities. The expected rate of return on cash is the Bank of England base rate in force at the effective date. Level 1 investments represent mutual funds for which a quoted market price is available on an active market. These investments primarily hold stocks or bonds, or a combination of stocks and bonds. Defined Contribution Plans The Company has defined contribution plans in domestic and international locations under which the Company matches a portion of the 71 16. Lines of Credit As of September 30, As of September 30, 17. Commitments and Contingencies Operating Leases The Company occupies office space under lease agreements expiring at various dates during the next The Company was obligated under non-cancelable operating leases with an initial term in excess of one year as follows: Fiscal year ending September 30: (Amounts in thousands) 2020 $ 475 2021 173 2022 58 2023 43 Total $ 749 Occupancy expenses under the operating leases approximated Capital Leases The Company leases equipment under agreements expiring at various times during the next four years. The Company has the capital lease obligation within its consolidated balance sheets. The current portion of $0.4 million is within accounts payable and accrued expenses and the long-term portion of $0.3 million is included in other long term liabilities. The assets acquired under the capital leases were sub-leased to a customer. See Investment in Lease Note 4. 72 The Company was obligated under non-cancelable capital leases as follows: Fiscal year ending September 30: (Amounts in thousands) 2020 $ 363 2021 285 2022 51 2023 5 Minimum lease payments including interest $ 704 Amount representing interest (46) Minimum lease payments excluding interest $ 658 Common Stock Repurchase From time to time the 18. Segment Information The following table presents certain operating segment information. Technology Solutions Segment High Performance Products United Consolidated For the year ended September 30, Segment Kingdom U.S. Total Total (Amounts in thousands) 2019 Sales: Product $ 6,406 $ 4,936 $ 54,675 $ 59,611 $ 66,017 Service 1,496 380 11,168 11,548 13,044 Total sales 7,902 5,316 65,843 71,159 79,061 Income (loss) from operations (3,085) (62) 2,321 2,259 (826) Total assets 11,548 10,530 37,291 47,821 59,369 Capital expenditures 310 6 516 522 832 Depreciation and amortization 230 6 180 186 416 2018 Sales: Product $ 7,014 $ 7,501 $ 45,146 $ 52,647 $ 59,661 Service 3,465 606 9,184 9,790 13,255 Total sales 10,479 8,107 54,330 62,437 72,916 Income (loss) from operations (2,777) (475) 1,651 1,176 (1,601) Total assets 14,869 13,854 26,552 40,406 55,275 Capital expenditures 99 1 338 339 438 Depreciation and amortization 243 7 375 382 625 Profit (loss) from operations is sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by either non-operating charges/income or by income taxes. Non-operating charges/income consists principally of investment income and interest expense. All intercompany transactions have been eliminated. 73 The following table details the % of 2019 Americas Europe Asia Total Total (Amounts in thousands) TS $ 67,228 $ 3,285 $ 646 $ 71,159 90 % HPP 5,294 771 1,837 7,902 10 % Total $ 72,522 $ 4,056 $ 2,483 $ 79,061 100 % % of Total 92 % 5 % 3 % 100 % 2018 TS $ 52,034 $ 9,059 $ 1,344 $ 62,437 86 % HPP 8,424 1,266 789 10,479 14 % Total $ 60,458 $ 10,325 $ 2,133 $ 72,916 100 % % of Total 83 % 14 % 3 % 100 % Substantially all Americas amounts are United States. Long-lived assets by geographic location at September 30, September 30, 2019 2018 (Amounts in thousands) North America $ 1,270 $ 844 Europe 3 3 Totals $ 1,273 $ 847 Deferred tax assets by geographic location at September 30, September 30, 2019 2018 (Amounts in thousands) North America $ 1,946 $ 1,895 Europe — — Totals $ 1,946 $ 1,895 The following table lists customers from which the Company derived revenues in excess of 10% of total revenues for the years ended years ended September 30, For the years ended September 30, 2019 September 30, 2018 % of % of Amount Revenues Amount Revenues (Amounts in millions) Customer A $ 3.8 5 % $ 7.5 10 % Customer B $ 10.2 13 % $ 1.1 3 % In addition, accounts receivable from Customer A totaled approximately 74 19. Fair Value Under the fair value standards fair value is based on the exit price and defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement should reflect all the assumptions that market participants would use in pricing an asset or liability. A fair value hierarchy is established in the authoritative guidance outlined in three levels ranking from Level 1 to level 3 with Level 1 being the highest priority. Level 1: observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly Level 3: unobservable inputs (e.g., a reporting entity’s or other entity’s own data) The Company had no assets or liabilities measured at fair value on a recurring (except our pension plan assets, see Note 15) or non-recurring basis as of To estimate fair value of the financial instruments below quoted market prices are used when available and classified within Level 1. If this data is not available, we use observable market based inputs to estimate fair value, which are As of September 30, 2019 As of September 30, 2018 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Level Reference (Amounts in thousands) Assets: Cash and cash equivalents $ 18,099 $ 18,099 $ 25,107 $ 25,107 1 Consolidated Balance Sheets Accounts & long term receivable* 7,087 7,087 — — 3 Note 3 Liabilities: Note payable 1,001 1,001 — — 2 Note 11 *Original maturity over one year Cash and cash equivalents Carrying amount approximated fair value. Accounts and long term receivable with original maturity over one year Fair value was estimated by discounting future cash flows based on the current rate with similar terms. Note Fair value was estimated based on quoted market prices. Fair value of accounts receivable with an original maturity of one year or less and accounts payable was not materially different from their carrying values at September 30, 2019, and 2018. 75 20. Dividend For the years ended September Amount Paid Fiscal Year Date Declared Record Date Date Paid Per Share 2018 12/19/2017 12/29/2017 1/16/2018 $ 0.11 2018 2/12/2018 2/28/2018 3/16/2018 $ 0.11 2018 5/9/2018 5/31/2018 6/15/2018 $ 0.11 2018 8/13/2018 8/31/2018 9/14/2018 $ 0.15 2019 12/27/2018 1/7/2019 1/22/2019 $ 0.15 2019 2/12/2019 2/28/2019 3/14/2019 $ 0.15 2019 5/8/2019 5/31/2019 6/14/2019 $ 0.15 2019 8/7/2019 8/30/2019 9/13/2019 $ 0.15 76Item 1A.Risk Factors2017, two customers2019, one customer accounted for approximately $33.2$10.2 million in revenue, or 30%13% of our total revenues for the fiscal year. A significant reduction in the sales to or loss of any of our major customers would have a material adverse effect on our business, financial condition and results of operations. In addition, our revenues are largely dependent upon the ability of our customers to continue to grow or need services or to develop and sell products that incorporate our products. No assurance can be given that our customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, our results of operations.6%4% of our total revenue in fiscal year 20172019 and 6% of our total revenue in fiscal year 20162018 from the DoD as a subcontractor. We expect that the DoD contracts 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 relationship 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.technology. technology. If we are unable to do so on a timely basis our business could be materially adversely affected.days'days’ notice and may cease offering products to us upon 180 days'days’ notice. Although we do not consider the risk of interruption of supply to be a significant risk in the near term, if in the future, Mellanox Technologies were to limit or reduce the sale of such components to us, or if these or otheroperations areoperation is subject to a number of risks.and Germany.The sale of our German operation in fiscal year 2018 is treated as discontinued operations in our 2018 financial statements. Foreign-based revenue is determined based on the location to which the product is shipped or services are rendered and represented 37%8% and 31%17% of our total revenue for the fiscal years ended September 30, 20172019 and 2016,2018, respectively. If revenues generated by foreign activities are not adequate to offset the expense of establishing and maintaining these foreign activities, our business, financial condition and results of operations could be materially adversely affected. In addition, there are certain risks inherent in transacting business internationally, such as changes in applicable laws and regulatory requirements, export and import restrictions, export controls relating to technology, 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 of which could adversely impact the success of our international activities. In particular, it is possible activity in the United Kingdom and the rest of Europe will be adversely impacted and that we will face increased regulatory and legal complexities, including those related to tax, trade, and employee relations as a result of Brexit. A portion of our revenues are from sales to foreign entities, including foreign governments, which are primarily paid in the form of foreign currencies. There can be no assurance that one or more of such factors will not have a material adverse effect on our future international activities and, consequently, on our business, financial condition or results of operations.maycould have a material adverse effect on our business, financial condition and results of operations.(CR)("CR") that temporarily funds federal agencies. Recent CRs have generally provided funding at the levels provided in the previous fiscal year and have not authorized new spending initiatives. When the federal government operates under a CR, delays can occur in the procurement of products and services. Historically, such delays have not had a material effect on our business; however, should funding of the federal government by CR be prolonged or extended, and sequestration is not alleviated, it could continue to have significant consequences to our business and our industry.cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; 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; and control or prohibit the export of our data and technology.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 quality 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 replacement products 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, or restructuring charges; andchanges in estimates of completion on fixed price service engagements.procedures for financial reporting which in 2015, 2016 and 2017, we determined have not been effective due to a material weakness described below.procedures. If we have a material weakness in our internal controls, our results of operations or financial condition may be materially adversely affected or our stock price may decline. As of September 30, 2017, we have identified a material weakness in connection with controls over revenue recognition in foreign subsidiaries. See Item 9A "Controls and Procedures" else where in this document.Our operating results may fluctuate significantly.Our operating results have fluctuated widely on a quarterly and annual basis during the last several years and we expect to experience significant fluctuations in future operating results. Many factors, some of which are beyond our control, have contributed to these fluctuations in the past and may continue to do so. Such factors include:sales in relatively large dollar amounts to a relatively small number of customers;competitive pricing programs and volume discounts;loss of customers;market acceptance of our products;product obsolescence;general economic conditions;change in the mix of products sold;whether or not we are able to secure design wins for significant customer systems;timing of significant orders;delays in completion of internal product development projects or introduction of new products;delays in shipping our products;delays in acceptance testing by customers;production delays due to quality programs with outsourced components;shortages of components;timing of product line transitions;uncertainty and timing of funding of governmental programs, including defense;declines of revenues from previous generations of products following announcement of replacement products containing more advanced technology; andfixed nature of our expenditures on personnel, facilities and marketing programs.We believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and should not be relied upon as indicative of our future performance. It is also possible that in some periods, our operating results may be below the expectations of securities analysts and investors. In such circumstances, the price of our common stock may decline.research and development (R&D).R&D. As a result of our need to maintain or increase our spending levels for R&D in this area and the difficulty in reducing costs associated with R&D, our operating results could be materially harmed if our revenues fall below expectations. In addition, as a result of CSPI'sCSPI’s commitment to invest in R&D, spending as a percent of revenues may fluctuate in the future. Further, if we fail to invest sufficiently in R&D or our R&D does not produce competitive results, our products may become less attractive to our customers or potentialOur management identified a material weakness in internal controls over financial reporting as of September 30, 2017. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting at our foreign subsidiaries, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected in a timely basis.The material weakness, which was first identified in fiscal year 2015, was in connection with our controls over the revenue recognition process, specifically that revenue recognition criteria have been satisfied prior to recognizing revenue and the failure to sufficiently assess gross versus net revenue indicators to certain revenue transactions. We determined that controls over the revenue recognition process were not operating effectively and the resulting control deficiency amounted to a material weakness in our internal controls over financial reporting. As a result, we have concluded that the Company’s internal control over financial reporting are not effective as of September 30, 2017. Although we have implemented changes to our internal controls over financial reporting during the past three years, at this time we cannot conclude that the material weakness has been remediated. in order for us to provide reliable financial and other reports and effectively prevent fraud. These types of controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the proper preparation of our financial statements, as well as regarding the timely reporting of material information. If we cannot maintain effective internal control over financial reporting or disclosure controls and procedures, or provide reliable financial statements or SEC reports or prevent fraud, investors may lose confidence in our reported financial information, our common stock could be subject to delisting on the stock exchange where it is traded, our operating results and the trading price of our common stock could suffer and we might become subject to litigation.loss of a 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 commitments;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.company'scompany’s securities, securities class action litigation has often been instituted against such companies. If any shareholders were to issue a lawsuit, we could incur substantial costs defending the lawsuit and the attention of managementItem 2.Properties2017.2019. Management considers all facilities listed below to be suitable for the purpose(s) for which they are used, including manufacturing, research and development, sales, marketing, service and administration.LocationPrincipal UseOwned LeasedFloor AreaTS Segment Properties:Modcomp, Inc.Division HeadquartersLeased11,815 S.F.1182 East Newport Center DriveSales, Marketing andDeerfield Beach, FL 33442AdministrationModular Computer Systems GmbHSales, Marketing, ServiceLeased11,031 S.F.Oskar-Jager-Strasse 173/K4and AdministrationD-50825 KolnGermanyModcomp, Ltd.Sales, Marketing andLeased2,490 S.F.12a Oaklands Business Park, Fishponds RoadAdministrationWokingham BerkshireUnited KingdomRegistrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 2017 2016 1st Quarter $ 11.95 $ 7.89 $ 7.18 $ 5.28 2nd Quarter 11.35 8.25 6.95 5.36 3rd Quarter 11.23 10.00 9.09 5.92 4th Quarter 11.20 9.61 10.95 8.00 7665 holders of record of our common stock as of December 22, 2017.3, 2019. This number does not include stockholders for whom shares were held in a “nominee” or “street” name. We believe the number of beneficial owners of our shares of common stock (including shares held in street name) at that date was approximately 1,783.1,450.20172019 and 2016,2018, the Company declared and paid cash dividends as follows:Fiscal Year Date Declared Record Date Date Paid Amount Paid Per Share 2016 12/23/2015 12/31/2015 1/11/2016 $0.11 2016 2/16/2016 2/26/2016 3/11/2016 $0.11 2016 5/11/2016 5/27/2016 6/10/2016 $0.11 2016 8/18/2016 8/31/2016 9/9/2016 $0.11 2017 1/12/2017 1/27/2017 2/8/2017 $0.11 2017 2/23/2017 3/3/2017 3/17/2017 $0.11 2017 5/24/2017 6/1/2017 6/15/2017 $0.11 2017 8/14/2017 8/21/2017 9/5/2017 $0.11 Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations20172019 Results of Continuing Operations$8.1$6.2 million, or 8%, to $111.5$79.1 million for the fiscal year ended September 30, 20172019 versus $103.4$72.9 million for the fiscal year ended September 30, 2016.24%25% of revenues for the fiscal year ended September 30, 20162018 to 23% for the fiscal year ended September 30, 2017.2019.incomeloss of approximately $3.8$0.8 million for both fiscal yearsyear ended September 30, 2017 and2019 as compared to an operating loss of approximately $1.6 million for fiscal year ended September 30, 2016. September 30, 2017 September 30, 2016 (Dollar amounts in thousands) Sales $ 111,482 100 % $ 103,367 100 % Costs and expenses: Cost of sales 85,992 77 % 78,326 76 % Engineering and development 2,362 2 % 2,984 3 % Selling, general and administrative 19,356 17 % 18,256 18 % Total costs and expenses 107,710 97 % 99,566 96 % Operating income 3,772 3 % 3,801 4 % Other income (expense), net 21 — % (201 ) — % Income before income taxes 3,793 3 % 3,600 3 % Income tax expense 1,287 1 % 996 1 % Net income $ 2,506 2 % $ 2,604 3 % $8.1$6.2 million, or 8%, to $111.5$79.1 million for the fiscal year ended September 30, 20172019 versus $103.4$72.9 million for the fiscal year ended September 30, 2016.2018. Our HPP segment revenue decreased by approximately $2.5$2.6 million primarily due to a decline of $2.3$1.7 million in the Myricom product revenue,royalty revenues, a decline of $0.2 million in Multicomputer service revenues, and a $1.3decline of $1.6 million decline in MulticomputerMyricom product revenues, partially offset by $1.1a $0.9 million increase in royaltyMulticomputer product revenues. Our TS segment revenue increased by approximately $10.6$8.7 million from increasesan increase of $4.1 million, $3.5 million and $3.0$11.5 million in our U.S., U.K. and Germany divisions, respectively.HPP segment revenue change by product and services lines for the fiscal years ended September 30 were as follows :(Dollar amounts in thousands) Increase (decrease) 2017 2016 $ % Product $ 7,608 $ 11,190 $ (3,582 ) (32 )% Services 6,236 5,152 1,084 21 % Total $ 13,844 $ 16,342 $ (2,498 ) (15 )% The HPP segment revenue division, partially offset with a decrease of $2.5$2.8 million is primarily attributed to $2.3 million sales decline in the Myricom legacy Ethernet adapters with no significant increase in the FPGA products. There was also a $1.3 million decrease in Multicomputer product sales. The HPP segment's service revenue increase was due to additional royalty revenues related to the E2D program.(Dollar amounts in thousands) Increase 2017 2016 $ % Product $ 77,067 $ 66,645 $ 10,422 16 % Services 20,571 20,380 191 1 % Total $ 97,638 $ 87,025 $ 10,613 12 % theour U.S., U.K, and Germany divisions as previously noted. division partially offset by a decrease of $2.8 million in our U.K. division. The $10.4$7.0 million increase in TSincreasesan increase of $3.3 million, $3.7 million and $3.4$9.5 million in our U.S., U.K, division offset by a decrease of $2.5 million in our U.K. division. The increase in our U.S. division was primarily associated with two major customers and Germany divisions, respectively.the decrease in the U.K. division was primarily associated with a decrease with one major customer. The $0.2$1.8 million service revenue increase is related to an increase in the U.S. division of $0.8$2.0 million, partially offset by decreasesa decrease in Germany of $0.5 million and the U.K. division of $0.1$0.2 million.(Dollar amounts in thousands) For the years ended September 30, Increase (decrease) 2017 % 2016 % $ % Americas $ 69,982 63 % $ 71,115 69 % $ (1,133 ) (2 )% Europe 37,498 34 % 27,960 27 % 9,538 34 % Asia 4,002 4 % 4,292 4 % (290 ) (7 )% Totals $ 111,482 100 % $ 103,367 100 % $ 8,115 8 % large$12.1 million increase in Europe was largelythe Americas revenues for the fiscal year ended September 30, 2019 as compared to the fiscal year ended September 30, 2018 is primarily due to the multinational customerincreased revenues by our TS segment of approximately $15.2 million, partially offset with decreased sales by our HPP segment of approximately $3.1 million. The $6.3 million decrease in Europe revenue is primarily due to decreased sales by our UK division of approximately $5.5 million combined with a decrease by our TS segment’s US division of approximately $0.3 million and a decrease in our U.K. divisionHPP segment of approximately $0.5 million. The decrease in sales to Europe is due to one large customer that had significantly lower activity for somethe year ended September 30, 2019 when compared to September 30, 2018. The $0.4 million increase in Asia is primarily the result of increased revenues by our U.S. based customers.increased("GM") decreased by approximately $0.5$0.4 million to $25.5$18.0 million in fiscal year 20172019 as compared to gross margins of $25.0$18.4 million in fiscal year 2016.2018.gross margin ("GM")GM changes by segment for fiscal years 20172019 and 2016:2018:(Dollar amounts in thousands) 2017 2016 Increase (decrease) GM$ GM% GM$ GM% GM$ GM% HPP $ 9,345 68 % $ 10,111 62 % $ (766 ) 6 % TS 16,145 17 % 14,930 17 % 1,215 — % Total $ 25,490 23 % $ 25,041 24 % $ 449 (1 )% (Dollar amounts in thousands) 2017 2016 Increase (decrease) GM$ GM% GM$ GM% GM$ GM% Product $ 3,249 43 % $ 5,072 45 % $ (1,823 ) (2 )% Services 6,096 98 % 5,039 98 % 1,057 — % Total $ 9,345 68 % $ 10,111 62 % $ (766 ) 6 % increaseddecreased to 68%52% in fiscal year 2017,2019 from 62%59% in fiscal year 2016.2018. The 6% increase7% decrease in gross margin as a percentage of sales in the HPP segment was primarily attributed to the impact of an increasea decrease of $1.1$1.7 million in high margin Multicomputer royalty revenues, which was partially offset by a decrease in lower margin HPP product revenues of approximately $3.6 million.The impact of product mix within our TS segment on gross margins for the fiscal years ended September 30 was as follows:(Dollar amounts in thousands) 2017 2016 Increase (decrease) GM$ GM% GM$ GM% GM$ GM% Product $ 10,124 13 % $ 9,224 14 % $ 900 (1 )% Services 6,021 29 % 5,706 28 % 315 1 % Total $ 16,145 17 % $ 14,930 17 % $ 1,215 — % The overall TS segment gross margin as a percentage of sales was unchanged at 17% for the period. For fiscal year 2017 compared to fiscal year 2016, the $0.9 million increase in our TS segment product gross margins resulted from increased product revenues in all three divisions. The $0.3 million increase in the TS segment service gross margins resulted from a combination of increased service revenues of approximately $0.2 million combined with a general increase in overall service revenue margins from the MSP business.20172019 and 2016:2018:(Dollar amounts in thousands) For the years ended September 30, 2017 2016 $ Decrease % Decrease By Operating Segment: HPP $ 2,362 100 % $ 2,984 100 % $ (622 ) (21 )% TS — — % — — % — — % Total $ 2,362 100 % $ 2,984 100 % $ (622 ) (21 )% The $0.6 million decrease in engineeringindecreased by $0.5 million to $2.8 million for the HPP segment resulted from transitioning from the external development of our latest generation Myricom products in fiscal year 2016ended September 30, 2019 as compared to $3.3 million for the internal development of our ARIA Software Defined Security ("SDS") product set in fiscal year 2017.ended September 30, 2018. The current fiscal year 2017 expenses arewere primarily for product engineering expenses incurred in connection with the development of the nVoy and new20172019 and 2016:2018:(Dollar amounts in thousands) For the years ended September 30, 2017 % of
Total 2016 % of
Total $ Increase (decrease) % Increase (decrease) By Operating Segment: HPP $ 5,516 28 % $ 5,663 31 % $ (147 ) (3 )% TS 13,840 72 % 12,593 69 % 1,247 10 % Total $ 19,356 100 % $ 18,256 100 % $ 1,100 6 % 20172019 compared to fiscal year 2016, the HPP segment SG&A spending decrease of $0.1 million is primarily attributed to decreases in variable compensation costs of approximately $0.5 million partially offset by increases in outside consulting expenses of approximately $0.3 million. In fiscal year 2016, we had a net gain of $0.4 million on insurance proceeds from an officer life insurance policy and a $0.3 million decrease in the cash surrender value of the underlying officer's life insurance policies. For fiscal year 2017 compared to fiscal year 2016,2018, the TS segment SG&A spending increase of approximately $1.2$0.5 million is substantially the result of an increase in our U.S. division of $0.4$1.2 million primarily attributed to variable selling expenses and additional engineering and sales hires, combined with spending increases of $0.1 million andhires. This was partially offset by a $0.7 million decrease in ourthe U.K. division attributed to reduction in staff and German divisions, respectively. Thevariable compensation expense.increase in Germanydecrease of $1.2 million is primarily attributed to sellingdecreases in expenses related to the sale of our German operations, audit expenses, and the increase in the U.K. is attributed to administrative costs.20172019 and 2016:2018:(Dollar amounts in thousands) For the years ended September 30, 2017 2016 Increase (decrease) Interest expense $ (76 ) $ (87 ) $ 11 Interest income 11 7 4 Foreign exchange loss (3 ) (134 ) 131 Other income, net 89 13 76 Total other income (expense), net $ 21 $ (201 ) $ 222 expensebenefit of approximately $1.3 million, which reflected an effective tax expense rate of 33.9% for the year ended September 30, 2017, which was lower than the statutory rate due in part to the tax benefit from research and development credits. For the year ended September 30, 2016, the income tax expense was approximately $1.0 million,$71 thousand, which reflected an effective tax rate of 27.7%.16.1% for the year ended September 30, 2019. The lowertax benefit includes an increase in the valuation allowance for net operating losses for state income tax related in the High Performance Products segment where we also had a reversal of the uncertain tax position of $54 thousand as that the statute of limitations have expired. For the year ended September 30, 2018, the income tax expense was approximately $882 thousand, which reflected an effective tax rate of (79.7%). The impact of the Tax Reform Act, which was recorded in fiscal year 2018, included remeasurement of the Company’s US deferred tax assets and liabilities to a 24.3% for 2016 as comparedcurrent and 21% for the non-current portions resulted instatutory rate was due in part to a large research and development credit.2017,2019, management assessed the positive and negative evidence in the U.SU.S. operations, and estimated that we will have sufficient future taxable income to utilize the existing deferred tax assets. Significant objective positive evidence included the cumulative profits that we realized in recent fiscal years. This evidence enhances our ability to consider other subjective evidence such as our projections for future growth. Other factors that we considered are the likelihood for continued royalty income in future years, new product revenue from cyber security products, and our expectation that the TS segment will continue to be profitable in future years. On the basis of this evaluation, as of September 30, 2017,2019, we have concluded that our U.S. deferred income tax asset related to net operating losses carryforward for the High Performance Products segment is more likely than not to be realized except for certain state net operating loss carryforwards and tax credit carry forwards. We recorded a $235 thousand valuation allowance for certain state-related assets that are not likely to be realized. It should be noted however, that the amount of the deferred tax asset not to be realized could be adjusted in future years, if estimates of taxable income during the carryforward periods are reduced,increased, or if there is objective negativepositive evidence in the form of cumulative losses. On December 20, 2017, the Tax Cutsand Jobs Act bill was passed by Congress. Once the bill is signed into law, the change in the tax law will lower our overall tax rate and reduce our deferred taxes and will be treated as a discrete item in the quarter enacted. earnings.will still need to assess the effect of the new law when enacted on our effective tax rate.Wealso continue to maintain a full valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.increaseddecreased by approximately $0.8$7 million to $13.9$18.1 million as of September 30, 20172019 from $13.1$25.1 million as of September 30, 2016. At September 30, 2017, cash equivalents totaled $0.5 million of this amount.20172019 included net income of approximately $2.5 million, an increase in accounts payable and accrued expenses of approximately $6.5$6.4 million, an increase in deferred revenuesproceeds from debt of approximately $1.2$1.0 million, and a decrease in life insurance receivablesrefundable income taxes of approximately $0.4$0.6 million. PartiallyMore than offsetting these significant sources of cash were an increase in long term receivables of approximately $5.3 million, an increase in other assets and deferred costs of approximately $3.1 million, an increase in accounts receivable of approximately $8.1$2.1 million, and payment of dividends of approximately $1.7 million, an increase in deferred costs$2.5 million. Cashsubsidiaries locatedsubsidiary in Germany and the U.K.United Kingdom totaled approximately $4.6$9.1 million as of September 30, 20172019, which consists of 3.1 million euros, 0.2 million British Pounds, and $6.45.9 million as of September 30, 2016.U.S. Dollars. This cash is included in our total cash and cash equivalents reported above. We consider this cash to be permanently reinvested into these foreign locations to support their operations and growth.2017 and September 30, 2016,2018, the Company maintained a line of credit that allows for borrowings of up to $1.0 million. Availability under the facility iswas reduced by outstanding borrowings thereunder. The interest rates on outstanding borrowings iswas London Inter-Bank Offer Rate (“LIBOR”("LIBOR") plus 2.5%, with a floor of 4%. Borrowings under the credit agreements are required to be repaid on demand in certain circumstances, upon termination of the agreements, or may be prepaid by the Company without penalty. The Company had no amounts outstanding under the line of credit during the fiscal years endingat September 30, 2017 and 2016.20172019 and September 30, 2016,2018, the Company also maintained an inventory line of credit that may be used by the TS segment in the U.S. to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. In fiscal year 2019, HPP gained access to this inventory line of credit, but did not use it. No interest accrues under the inventory line of credit when advances are paid within terms, however, late payments are subject to an interest charge of Prime plus 5%. The credit agreementsagreement for the inventory line of credit containcontains financial covenants which require the Company to maintain the following TS segment-specific financial ratios: (1) a minimum current ratio of 1.2, (2) tangible net worth of no less than $4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0:1. As of September 30, 20172019 and September 30, 2016,2018, Company borrowings under the inventory line of credit which is included as a component of accounts payable and accrued expenses on the accompanying consolidated balance sheets, were $3.1$2.5 million and $3.2 million, respectively, and the Company was in compliance with all covenants.1216 - Lines of Credit, in the Notes to our Consolidated Financial Statements contained in this annual report on Form 10-K.Recognitionfrom Contracts with Customersmaintenance contracts, othermanaged services, financing of hardware and third party service contracts. Professional services generally include implementation, installation, and training services. Other services generally include revenue generated through our royalty and extended warranty contracts. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed and determinable and collectability is reasonably assured. We enter into multiple element arrangements as well as standalone sales of product, professional services,software, and other services.standalone product saleshardware upon transfer of title,control, which is at a point in time typically upon shipment provided all other revenue recognition criteria have been met.when title transfers. Revenue generated from standalone professional services and extended warranty contractssoftware is recognized as services are performed, provided all other revenue recognition criteria have been met. In some instances professional service contracts includeat a customer acceptance provision,point in which case revenuetime when the license is deferred until we have evidence of customer acceptance. granted.usage based royalty contracts upon confirmation from the customer of shipment of the system produced pursuant to the royalty agreement.We recognize revenue from multiple element arrangements in accordance with Accounting Standards Codification ("ASC") 605-25, Multiple Element Arrangements. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each element. ASC 605-25 establishes a hierarchy for determining the amount to allocate to each separate deliverable in an arrangement. We determine selling price using vendor specific objective evidence (“VSOE”), if it exists; or, if VSOE does not exist, third party evidence (“TPE”) of fair value is applicable; otherwise, we use the best estimate of selling price (“BESP”). The objective of BESP is to determine the price at which the Company would transact if the element was sold on a standalone basis. Management’s determination of BESP involves several factors including budgeted profit margins, and cost to complete services.We recognize revenue from third partythird-party service contracts as either gross sales or net sales in accordance with ASC 605-45, Principal Agent Considerations, which requires us to determine ifdepending on whether the Company is acting as a principal party to the transaction or simply acting as an agent or broker. Under ASC 605-45,broker based on control and timing. The Company is a principal if it controls the assumption of the risks and rewards under the arrangement are considered indicators of principal partiesgood or service before that good or service is transferred to the arrangement.customer. We record revenue as gross when itthe Company is a principal party to the arrangement and net of cost when we are acting as a broker or agent. Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to revenue resulting in net sales equal to the gross profit on the transaction. Third-party service contracts are sold in different combinations with hardware, software, and services. We have determined the third-party services contracts are a single performance obligation in each sale. When the Company is an agent, revenue is typically recorded at a point in time. When the Company is the principal, revenue is recognized over the contract term. Multicomputer product revenue is generally recognized when product is shipped, provided that all revenue recognition criteria are met. Service revenue consists principally of warranty and royalty revenue. Revenue generated from extended warranty contracts is recognized as services are performed over the termof the contract, provided all other revenue recognition criteria have been met We recognize revenue from usage based royalty contracts upon confirmation from the customer of shipment of the system produced pursuant to the royalty agreement.Revenue from multiple element arrangements is recognized in accordance with ASC 605-25. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors, including, but not limited to, internal costs and gross margin objectives. Accordingly, revenue for postPost contract maintenance and support is recognized overconsidered immaterial in the implied maintenance periodcontext of three years,the contract and therefore is not a separate performance obligation.salesand services are sold together, the allocation of the transaction price to each performance obligation is recognized upon delivery assuming allcalculated using a budgeted cost-plus margin approach. Due to the complex nature of these contracts, there is significant judgment in allocating the transaction price. These estimates are periodically reviewed by project managers, engineers, and other revenue recognition criteria have been met.TS Segment RevenueTS Segment revenue is derived from the sale ofstaff involved to ensure estimates are appropriate. For items sold separately, including hardware, software, professional services, maintenance contracts, other services, and third partythird-party service contracts. TS productcontracts, there is no allocation performed as there is one performance obligation.recognizedthree to six years. Incremental costs are related to commissions in the TS portion of the business.product is shipped, providedthe costs are related to a contract or anticipated contract, generate or enhance resources that all revenue recognition criteriawill be used in satisfying performance obligations in the future, and costs are met. Service revenue consistsrecoverable. Costs to fulfill a contract are related to the TS portion of professionalthe business and involve activities performed before managed services which generally include implementation, installation,can be completed. Current capitalized fulfillment costs are in the account other current assets on the consolidated balance sheets. training services. Revenue generated from standalone professional services is recognized as the services are completed, provided all other revenue recognition criteria have been met. Our standard sales agreements generally do not include customer acceptance provisions. However, in certain instancestypically billed when arrangements include a customer acceptance provisionshipped or there is uncertainty about customer acceptance, revenue is deferred until we have evidence of customer acceptance.Revenue derived from the sale of products, which are comprised of both hardware and software, and professional services is recognized in accordance with ASC 605-25. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors, including, but not limited to, internal costs and gross margin objectives. Accordingly revenue for professional services is recognized as services are completed,being performed. Payment terms are typically 30 days to pay in full except in Europe where it could be up to 90 days. There are certain contracts that do contain a financing component. See Note 3 for details. Most of the Company’s contracts are less than one year. As a practical expedient, the Company has elected not to adjust the amount of consideration for effects of a significant financing component when it is anticipated the promised good or service will be transferred and revenue forthe subsequent payment will be one year or less. The Company elected to use the optional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that have an original expected duration of one year or less. This is due to a low amount of performance obligations less than one year being unsatisfied at each period end. Most of these contracts are related to product salessales. The Company has certain contracts that have an original term of more than one year. The royalty agreement is recognized upon delivery assuming all other revenue recognition criteria have been met.We also recognize TS segment revenue from certain third partylonger than one year and managed service contracts which are evaluated to determine whether such service revenue should be recorded as gross sales or net sales in accordance with ASC 605-45. We evaluate all third party service contracts to determine whether we act as a principal in the transaction and assume the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the entire selling price is recorded in sales and our cost to the third-party service provider or vendor is recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no costs of goods sold. We use the net sales recognition method for the third party service contracts that we sell when we are not the primary obligor on the contract. We use the gross sales recognition for the third party service contracts that we sell when we act as principal and are the primary obligor.90-day90‑day to three-year hardware warranty. At time of product shipment, we accrue for the estimated cost to repair or replace potentially defective products. Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.Company'sCompany’s tax liabilities involves dealing with uncertainties in the application of complex 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.Intangible2017.2019. Intangible 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 an annual basis. Intangible assets subject to amortization are also tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the fair value of an intangible asset subject to amortization is determined to be less than its carrying value, then an impairment charge is recorded to write down that asset to its fair value., Germany and in the U.S. In the U.K. and Germany,, the Company provides defined benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees. The defined benefit plans in both the U.K. and Germany are closed to newly hired employees and have been for the two years ended September 30, 2017.2019. In the U.S., the Company provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2017.2019. These supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the defined benefit plans. In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain officers. The Company also funds these supplemental plans'plans’ obligations through whole life insurance policies on the officers.20172019 or 2016.2018. There is no assurance that the Company'sCompany’s business will not be materially and adversely affected by inflation and changing prices in the future.Item 8.Financial Statements and Supplementary DataPage38 39 40 41 42 43 44 None.2017.2019. Our Chief Executive Officer, our Chief Financial Officer and other members of our senior management team supervised and participated in this evaluation. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e)13a‑15(e) and 15d-15(e)15d‑15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC'sSecurities and Exchange Commission’s ("SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'scompany’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,2019, the Company’s Chief Executivenot effective, due to the fact that we are not yet able to conclude that the material weakness described in this Item 9A has been remediated by the changes we made in response to that material weakness.Management'seffective. Company'sCompany’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f)13a‑15(f) under the Exchange Act, internal control over financial reporting is a process designed by or under the supervision of a company'scompany’s principal executive and principal financial officers and effected by a company'scompany’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. It includes those policies and procedures that:pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and the board of directors of a company; andprovide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company's assets that could have a material effect on its financial statements.Company'sCompany’s internal control over financial reporting as of September 30, 2017.2019. In making its assessment of internal control, management used the criteria described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (“COSO”("COSO") of the Treadway Commission. As a result of its assessment, management has concluded that the Company's internal control over financial reporting was not effective as of September 30, 2017.As of September 30, 2017, management has identified a material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected in a timely basis.The material weakness is in connection with our controls over the revenue recognition process at our foreign subsidiaries, specifically whether revenue recognition criteria have been satisfied prior to recognizing revenue and the failure to sufficiently assess gross versus net revenue indicators to certain revenue transactions. We determined that controls over the revenue recognition process were not operating effectively and the resulting control deficiency amounted to a material weakness in our controls over financial reporting. As a result, we have concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2017. Although we have implemented changes to our internal controls over financial reporting as described below, at this time, we cannot conclude that the material weakness has been remediated, as we continued to make personnel changes and upgrade systems throughout fiscal year 2017.During the periods following our initial identification of the material weakness referred to above, management assessed various alternatives to remediate this material weakness and we implemented additional changes to our system of internal controls, which included the implementation of enhanced internal auditing procedures, whereby a comprehensive review form is prepared for all new revenue transactions. Our review process has been expanded to include corporate and TS accounting personnel reviews to ensure the correct accounting methodology is applied to all revenue transactions. We also created new revenue reports from the German ERP system to assist in the revenue transaction review process. During the twelve months ended September 30, 2017, management took additional actions to upgrade our international accounting staff with the hiring of a new controller and added consultants to assist in the revenue transaction processing which will improve accounting operations in our European divisions.10-K10‑K does not include an attestation report of the Company'sCompany’s independent registered public accounting firm regarding internal control over financial reporting. Management'sManagement’s assessment of the effectiveness of theCompany's Company’s internal control over financial reporting as of September 30, 20172019 was not subject to attestation by the Company'sCompany’s independent registered public accounting firm pursuant to rules of the SEC that call for the Company to provide only management'smanagement’s report in this Annual Report on Form 10-K.2017,2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.None.Item 10.Directors, Executive Officers and Corporate Governance20182020 Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 20172019..Item 11.Executive Compensation20182020 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 20172019..Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInc.1997Inc. 1997 Incentive Stock Option Plan, the 2003 Stock Incentive Plan, the 2007 Stock Incentive Plan, the 2014 Employee Stock Purchase Plan (the "ESPP") and the 2015 Stock Incentive Plan .Plan. In fiscal 20172019 and 2016,2018, the Company granted to certain key employees, certain officers including its Chief Executive Officer and non-employee directorsdirectors’ shares of non-vested common stock instead of stock options. The vesting periods for the officers'key employees’, officers’, the Chief Executive Officer'sOfficer’s and the directors'non-employee directors’ non-vested stock awards are four years, three years and one year, respectively. The following20172019 regarding the total number of securities outstanding under these equity compensation plans. (b) Equity compensation plans approved by security holders 189,197 $ 4.49 333,051 179,821190,735 non-vested shares issued and 2,000 stock options issued.183,965320,715 shares available for future issuance under the stock incentive and stock option plans and 149,08696,953 under the ESPP.20182020 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended 2017.Item 13.Certain Relationships and Related Transactions and Director Independence20182020 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2017.Item 14.Principal Accountant Fees and Services20182020 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 20172019..Item 15.Exhibits and Financial Statement Schedules20172019 and 201620172019 and 2016 (Loss) for the years ended September 30, 20172019 and 2016Shareholders'Shareholders’ Equity for the years ended September 30, 20172019 and 201620172019 and 20162018
No.
this Form
10‑K
No.3.1 3.2 10.3 10.2 10.10 10.11 10.11 10.21 10.20 10.1 10.2 2.1 (3) Exhibits Incorporated by Reference Form Filing Date 3.1 Articles of Organization and amendments thereto 10-K December 26, 2007 3.1 3.2 By-laws, as amended December 13, 2012 10-K December 20, 2012 3.1 10.1 Form of Employee Invention and Non-Disclosure Agreement 10-K November 22, 1996 10.3 10.2 CSPI Supplemental Retirement Income Plan 10-K December 29, 2008 10.2 10.3* 2007 Stock Incentive Plan DEF 14A March 30, 2007 B 10.4* 2014 Variable Compensation (Executive Bonus) and Base Programs dated November 12, 2013 10-K December 23, 2014 10.10 10.5* Death Benefit and Retirement Benefit Agreement between the Company and Victor Dellovo dated September 13, 2013 10-K December 24, 2013 10.11 10.6* Form of Change of Control Agreement with Gary W. Levine and William E. Bent Jr. each dated January 11, 2008 10-K December 22, 2009 10.11 10.7* 2014 Employee Stock Purchase Plan DEF 14A January 6, 2014 A 10.8* 2015 Stock Incentive Plan DEF 14A January 5, 2015 A 10.9 2015 Lowell, MA Lease 10-K December 24, 2015 10.21 10.10 2015 Deerfield Beach, FL Lease 10-K December 24, 2015 10.20 Subsidiaries X Consent of RSM LLP, Independent Registered Public Accounting Firm X Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS XBRL Instance 101.SCH XBRL Taxonomy Schema 101.CAL XBRL Taxonomy Extension Calculation 101.DEF XBRL Taxonomy Extension Definition 101.LAB XBRL Taxonomy Extension Labels 101.PRE XBRL Taxonomy Extension Presentation *Management contract or compensatory plan.CSP INC.By:
Chief Executive Officer and President22, 2017NameTitle Date /s/22, 201710, 2019
(Principal Financial Officer)22, 201710, 2019
(Chief Accounting Officer)22, 201710, 201922, 201710, 201922, 201710, 201922, 201710, 201922, 201710, 2019Lowell, MA20172019 and 2016, and2018, the related consolidated statements of operations, comprehensive income, (loss), shareholders'shareholders’ equity and cash flows for the years then ended. ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.Company'sCompany’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includessupportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.December 22, 2017 September 30,
2017 September 30,
2016ASSETS Current assets: Cash and cash equivalents $ 13,885 $ 13,103 Accounts receivable, net of allowances of $261 and $240 27,630 18,997 Unbilled accounts receivable 772 567 Inventories 5,971 5,580 Deferred costs 929 635 Deferred income taxes 1,393 1,331 Other current assets 1,139 1,586 Total current assets 51,719 41,799 Property, equipment and improvements, net 1,508 1,680 Other assets: Intangibles, net 167 287 Deferred costs 609 18 Deferred income taxes 1,434 1,723 Cash surrender value of life insurance 3,300 3,015 Other assets 191 185 Total other assets 5,701 5,228 Total assets $ 58,928 $ 48,707 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 18,845 $ 11,932 Deferred revenue 6,202 4,704 Pension and retirement plans 534 581 Income taxes payable 442 166 Total current liabilities 26,023 17,383 Pension and retirement plans 11,818 13,441 Other long term liabilities 86 228 Total liabilities 37,927 31,052 Commitments and contingencies Shareholders’ equity: Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,935 and 3,821 shares, respectively 40 39 Additional paid-in capital 13,717 12,924 Retained earnings 17,407 16,623 Accumulated other comprehensive loss (10,163 ) (11,931 ) Total shareholders’ equity 21,001 17,655 Total liabilities and shareholders’ equity $ 58,928 $ 48,707 For the years ended September 30,
2017 September 30,
2016Sales: Product $ 84,675 $ 77,835 Services 26,807 25,532 Total sales 111,482 103,367 Cost of sales: Product 71,302 63,539 Services 14,690 14,787 Total cost of sales 85,992 78,326 Gross profit 25,490 25,041 Operating expenses: Engineering and development 2,362 2,984 Selling, general and administrative 19,356 18,256 Total operating expenses 21,718 21,240 Operating income 3,772 3,801 Other expense: Foreign exchange loss (3 ) (134 ) Other income (expense), net 24 (67 ) Total other income (expense), net 21 (201 ) Income before income taxes 3,793 3,600 Income tax expense 1,287 996 Net income $ 2,506 $ 2,604 Net income attributable to common stockholders $ 2,398 $ 2,495 Net income per share – basic $ 0.64 $ 0.69 Weighted average shares outstanding – basic 3,723 3,609 Net income per share – diluted $ 0.63 $ 0.67 Weighted average shares outstanding – diluted 3,817 3,734 (LOSS) For the years ended September 30,
2017 September 30,
2016 Net income $ 2,506 $ 2,604 Other comprehensive income (loss): Unrealized actuarial gain (loss) on minimum pension liability, net of tax effect 2,175 (3,564 ) Foreign currency translation gain (loss) (407 ) 18 Other comprehensive gain (loss) 1,768 (3,546 ) Total comprehensive income (loss) $ 4,274 $ (942 ) Shares Amount Balance as of September 30, 2015 3,688 $ 37 $ 12,249 $ 15,689 $ (8,385 ) $ 19,590 Comprehensive loss: Net income — — — 2,604 — 2,604 Other comprehensive loss — — — — (3,546 ) (3,546 ) Stock-based compensation — — 414 — — 414 Restricted stock issuance 86 1 — — — 1 Issuance of shares under employee stock purchase plan 33 1 175 — — 176 Exercise of stock options 14 86 — — 86 Cash dividends on common stock ($0.44 per share) — — — (1,670 ) — (1,670 ) Balance as of September 30, 2016 3,821 39 12,924 16,623 (11,931 ) 17,655 Comprehensive income: Net income — — — 2,506 — 2,506 Other comprehensive income — — — — 1,768 1,768 Stock-based compensation — — 577 — — 577 Restricted stock issuance 86 1 — — — 1 Issuance of shares under employee stock purchase plan 23 — 201 — — 201 Exercise of stock options 5 — 15 — — 15 Cash dividends on common stock ($0.44 per share) — — — (1,722 ) — (1,722 ) Balance as of September 30, 2017 3,935 $ 40 $ 13,717 $ 17,407 $ (10,163 ) $ 21,001 For the years ended September 30,
2017 September 30,
2016Cash flows from operating activities: Net income $ 2,506 $ 2,604 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 553 570 Amortization of intangibles 120 129 Loss on disposal of property, equipment and improvements 5 51 Foreign exchange loss 3 134 Non-cash changes in accounts receivable 47 27 Non-cash changes in inventory 294 602 Stock-based compensation expense on stock options and restricted stock awards 577 414 Deferred income taxes 262 (18 ) (Increase) decrease in cash surrender value of life insurance (135 ) 210 Changes in operating assets and liabilities: Increase in accounts receivable (8,095 ) (8 ) (Increase) decrease in officer life insurance settlement receivable 413 (413 ) Increase in inventories (660 ) (814 ) (Increase) decrease in deferred costs (797 ) 23 Decrease in refundable income taxes 34 44 Decrease in other assets 3 322 Increase (decrease) in accounts payable and accrued expenses 6,483 (1,648 ) Increase in deferred revenue 1,219 1,769 Increase (decrease) in pension and retirement plans liability (291 ) 606 Increase in income taxes payable 258 167 Increase (decrease) in other long term liabilities (140 ) 233 Net cash provided by operating activities 2,659 5,004 Cash flows from investing activities: Life insurance premiums paid (150 ) (161 ) Purchases of property, equipment and improvements (358 ) (735 ) Net cash used in investing activities (508 ) (896 ) Cash flows from financing activities: Dividends paid (1,722 ) (1,670 ) Proceeds from issuance of shares under equity compensation plans 216 263 Net cash used in financing activities (1,506 ) (1,407 ) Effects of exchange rate on cash 137 (779 ) Net increase in cash and cash equivalents 782 1,922 Cash and cash equivalents, beginning of period 13,103 11,181 Cash and cash equivalents, end of period $ 13,885 $ 13,103 Supplementary cash flow information: Cash paid for income taxes $ 1,142 $ 334 Cash paid for interest $ 75 $ 86 (“CSPI”("CSPi" or “the Company”"CSPI" or “we”"the Company" or “our”"we" or "our") was founded in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of commercial and defense customers worldwide, CSPI and its subsidiaries develop and market IT integration solutions, advanced security products, managed IT services, purpose built network adapters, and high-performance cluster computer systems. The Company operates in two segments, its HPPHigh Performance Products ("HPP") segment and its TSTechnology Solutions ("TS") segment.Company'sCompany’s foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at average rates in effect during the period. The resulting translation adjustment is reflected as accumulated other comprehensive income (loss),loss, a separate component of shareholders'shareholders’ equity on the consolidated balance sheets. The translation adjustment for intercompany foreign currency loans that are of a long-term-investment nature is also reflected as accumulated other comprehensive income (loss). Currency transaction gains and losses are recorded as other income (expense) in the consolidated statements of operations.Fair Value of Financial InstrumentsOur financial instruments are limited to cash and cash equivalents, accounts receivable, pension plan assets, accounts payable and our inventory line of credit. Fair value of these financial instruments was not materially different from their carrying values at September 30, 2017, and 2016.20172019 and 2016,2018, our expenses for research and development were approximately $2.4$2.8 million and $3.0$3.3 million,, respectively. Expenditures for research and development are expensed as they are incurred.2017.2019. Intangible assets subject to amortization are amortized on a straight-line basis 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 an annual basis. Intangible assets subject to amortization aremarket,net realizable value, with cost determined using the first-in, first-out method. The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. For the years endedAs of September 30, 2017,2019, and September 30, 2016,2018, the Company wrote down approximately $294 thousandmaintained inventory reserves of $3.8 million and $602 thousand of inventory,$3.3 million, respectively.(three(three to seven years). Leasehold improvements are amortized by use of the straight-line method over the lesser of the estimated useful life of the asset or the lease term. Repairs and maintenance costs are expensed as incurred. Property, equipment and improvements are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If the fair value of property, equipment and improvements is determined to be less than their carrying value, then an impairment charge is recorded to write down that asset to its fair value.income,loss, net of tax, until they are amortized as a component of net periodic pension/postretirement benefits expense. Additionally, plan assets and obligations are measured as of our fiscal year-end balance sheet date (September 30)., Germany and in the U.S. In the U.K. and Germany, the Company provides defined benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees. The defined benefit plansplan in both the U.K. and Germany areis closed to newly hiredhavehas been for the two years ended September 30, 2017.2019. In the U.S., the Company also provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2017.2019. These supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the defined benefit plans. In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain officers. The Company also funds these supplemental plans'plans’ obligations through whole life insurance policies on the officers.processing.processing products. In the TS segment, we focus on value added reseller ("VAR") integrated solutions including third party hardware, software and technical computer-related consulting and mangedmanaged services. The operations and assets of our HPP segment are located in the United States. The operations and assets of our TS segment are located in the United States Germany, and the United Kingdom.Recognitionfrom Contracts with Customersmaintenance contracts, othermanaged services, financing of hardware and third party service contracts. Professional services generally include implementation, installation, and training services. Other services generally include revenue generated through our royalty and extended warranty contracts. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed and determinable and collectability is reasonably assured. We enter into multiple element arrangements as well as standalone sales of product, professional services,software, and other services.standalone product saleshardware upon transfer of title,control, which is at a point in time typically upon shipment provided all other revenue recognition criteria have been met.when title transfers. Revenue generated from standalone professional services and extended warranty contractssoftware is recognized as services are completed, provided all other revenue recognition criteria have been met. In some instances professional service contracts includeat a customer acceptance provision,point in which case revenuetime when the license is deferred until we have evidence of customer acceptance. granted.usage based royalty contracts upon confirmation from the customer of shipment of the system produced pursuant to the royalty agreement.We recognize revenue from multiple element arrangements in accordance with ASC 605-25, Multiple Element Arrangements. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each element. ASC 605-25 establishes a hierarchy for determining the amount to allocate to each separate deliverable in an arrangement. We determine selling price using vendor specific objective evidence (“VSOE”), if it exists; or, if VSOE does not exist, third party evidence (“TPE”) of fair value if applicable; otherwise, we use the best estimate of selling price (“BESP”). The objective of BESP is to determine the price at which the Company would transact if the element was sold on a standalone basis. Management’s determination of BESP involves several factors including budgeted profit margins, and cost to complete services.We recognize revenue from third partythird-party service contracts as either gross sales or net sales in accordance with ASC 605-45, Principal Agent Considerations, which requires us to determine ifdepending on whether the Company is acting as a principal party to the transaction or simply acting as an agent or broker. Under ASC 605-45,broker based on control and timing. The Company is a principal if it controls the assumption of the risks and rewards under the arrangement are considered indicators of principal partiesgood or service before that good or service is transferred to the arrangement.customer. We record revenue as gross when itthe Company is a principal party to the arrangement and net of cost when we are acting as a broker or agent. Under gross sales recognition, the entire selling price is recorded in revenue and our cost to the third-party service provider or vendor is recorded in cost of goods sold. Under net sales recognition, the cost Multicomputer product revenue is generally recognized when product is shipped, provided that all revenue recognition criteria are met. Service revenue consists principally of other services which comprise of warranty and royalty revenue. Revenue generated from extended warranty contracts is recognized as services are completed, provided all other revenue recognition criteria have been met We recognize revenue from usagebased royalty contracts upon confirmation from the customer of shipment of the system produced pursuant to the royalty agreement. In the years ended September 30, 2017 and 2016, respectively, $5.4 million and $4.3 million of royalty income is included in service revenues.Revenue on multiple element arrangements is recognized in accordance with ASC 605-25. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors, including, but not limited to, internal costs and gross margin objectives. Accordingly revenue for postPost contract maintenance and support is recognized overconsidered immaterial in the implied maintenance periodcontext of either one or three years,the contract and therefore is not a separate performance obligation.6,406 4,936 54,540 59,476 65,882 1,496 380 11,168 11,548 13,044 135 135 135 7,902 5,316 65,843 71,159 79,061 salesand services are sold together, the allocation of the transaction price to each performance obligation is recognized upon delivery assuming allcalculated using a budgeted cost-plus margin approach. Due to the complex nature of these contracts, there is significant judgment in allocating the transaction price. These estimates are periodically reviewed by project managers, engineers, and other revenue recognition criteria have been met.TS Segment RevenueTS Segment revenue is derived from the sale ofstaff involved to ensure estimates are appropriate. For items sold separately, including hardware, software, professional services, maintenance contracts, other services, and third partythird-party service contracts. TS product revenuecontracts, there is generally recognized when productno allocation performed as there is shipped, provided that all revenue recognition criteria are met. Service revenue consists of professional services which generally include implementation, installation,one performance obligation.training services. Revenue generated from standalone professional servicesLiabilitiesrecognized as services are completed, provided all other revenue recognition criteriarecorded. When the Company has been met. Our standard sales agreements generally do not include customer acceptance provisions. However, in certain instances when arrangements includethe right to bill a customer, acceptance provision or thereaccounts receivable is uncertainty about customer acceptance, revenue is deferred until we have evidence of customer acceptance.Revenue derived from the sale of products, which are comprised of both hardware and software, and professional services is recognized in accordance with ASC 605-25. We evaluate multiple element arrangements to determine if separate units of accounting exist, and if so, we allocate revenue to each element based upon the relative selling price of each element. We determine selling price using BESP. Management’s determination of BESP is based on several factors, including, but not limited to, internal costs and gross margin objectives. Accordingly revenue for professional services is recognized as services are completed, and revenue for product sales is recognized upon delivery assuming all other revenue recognition criteria have been met.We recognize revenue from certain third party service contracts, which are evaluated to determine whether such service revenue should be recorded as gross sales or net sales in accordance ASC 605-45. We evaluate all third party service contracts to determine whether we actan unconditional right exists. Current contract assets were $0.6 million and $1.1 million as a principal in the transactionof September 30, 2019 and assume the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the entire selling priceOctober 1, 2018, respectively. The current portion is recorded in salesother current assets on the consolidated balance sheets. There were no non-current contract assets as of September 30, 2019 and our costOctober 1, 2018. The difference in the balances is due to regular timing differences between when work is performed and having an unconditional right to payment.third-party service providercustomer. Current contract liabilities were $0.7 million and $0.9 million as of September 30, 2019 and October 1, 2018, respectively. The current portion of contract liabilities is recorded in deferred revenue on the consolidated balance sheets. The long-term portion of contract liabilities were $0.3 million as of September 30, 2019. There were none at October 1, 2018. These non-current liabilities are recorded in other noncurrent liabilities. Revenue recognized for the year ended September 30, 2019 that was included in contract liabilities as of the beginning of the period was $0.8 million.vendoranticipated contract, generate or enhance resources that will be used in satisfying performance obligations in the future, and costs are recoverable. Costs to fulfill a contract are related to the TS portion of the business and involve activities performed before managed services can be completed. Current capitalized fulfillment costs are in the account other current assets on the consolidated balance sheets. The portion of current capitalized costs was $47 thousand and $60 thousand as of September 30, 2019 and October 1, 2018, respectively. There are no non-current capitalized fulfillment costs on the consolidated balance sheets. The amount of fulfillment costs amortized for year ended September 30, 2019 was $13 thousand, which is recorded in cost of goods sold. Under net sales recognition,sales. There was no impairment related to fulfillment costs capitalized.costCompany’s contracts are less than one year. As a practical expedient, the Company has elected not to adjust the amount of consideration for effects of a significant financing component when it is anticipated the promised good or service will be transferred and the subsequent payment will be one year or less. There are certain contracts that do contain a financing component. See Note 3 to the third-partyconsolidated financial statements for additional information. The Company elected to use the optional exemption to not disclose the aggregate amount of the transaction price allocated to performance obligations that have an original expected duration of one year or less. This is due to a low amount of performance obligations less than one year being unsatisfied at each period end. Most of these contracts are related to product sales.provider or vendor is recorded as a reduction to sales resulting in net sales equalcontracts are generally longer than one year. For these contracts the aggregate amount of the transaction price allocated to the gross profit on the transaction and thereperformance obligations that are no costsunsatisfied or partially unsatisfied as of goods sold. We use the net sales recognition method for the third partySeptember 30, 2019 is mainly related to managed service contracts that we sell when we are notand is set forth in the primary obligor on the contract. We use the gross sales recognition for the third party service contracts that we sell when we act as principal and are the primary obligor.table below:2,019 1,033 300 60 3,412 90-days90‑days to three-years. At time of product shipment, we accrue for the estimated cost to repair or replace potentially defective products. Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.Company'sCompany’s tax liabilities involves dealing with uncertainties in the application of complex 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.or EPS,("EPS") utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.Company'sCompany’s reported net income attributable to common stockholders are as follows: September 30, 2017 September 30, 2016 (Amounts in thousands except per share data) Net income $ 2,506 $ 2,604 Less: Net income attributable to nonvested common stock 108 109 Net income attributable to common stockholders $ 2,398 $ 2,495 Weighted average total shares outstanding - basic 3,890 3,766 Less: weighted average non-vested shares outstanding 167 157 Weighted average number of common shares outstanding - basic 3,723 3,609 Potential common shares from non-vested stock awards and the assumed exercise of stock options 94 125 Weighted average common shares outstanding - diluted 3,817 3,734 Net income per share - basic $ 0.64 $ 0.69 Net income per share - diluted $ 0.63 $ 0.67 ForNon-vested restricted stock awards of 165,000 shares were excluded from net income per share for the year ended September 30, 2017, there were no shares subject to stock options excluded from the diluted income per share calculation because2018, and their inclusion would have been anti-dilutive. For the fiscal year ended September 30, 2016, approximately 25 thousand stock options were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive.Company'sCompany’s consolidated statements of operations.20172019 and 20162018 is based on awards ultimately expected to vest, it has been reduced for20172019 and 20162018 consisted of stock-based compensation expense related to options and restricted stock granted pursuant to the Company'sCompany’s stock incentive and employee stock purchase plans of approximately $0.6$0.8 million and $0.4$0.7 million, respectively., Germany and in the U.K. Deposits held with banks may exceed the amount of insurance on such deposits. Generally, these deposits may be redeemed upon demand. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.New PronouncementsFASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2014-09,2014‑09, Revenue from Contracts with Customers (ASC 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on October 1, 2018, and it does not plan to early adopt this ASU. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. We are utilizingThe ASU replaces most existing revenue recognition guidance in GAAP. The new standard was adopted by the Company effective October 1, 2018 using the modified retrospective approach only to contracts that were not completed as of adoption date. The Company recognized the cumulative effect of initial application as an adjustment to the opening balance of retained earnings. This resulted in an increase of $158 thousand to retained earnings as of October 1, 2018. This was primarily due to revenue related to customer support in the HPP segment no longer being deferred, which resulted in a bottom-up approach to analyze the standard's impact on our contract portfolio, comparing our historical accounting policies and practices, and identifying potential differences from applying the requirementsdecrease of deferred revenue as part of the new standardcumulative effect. Additionally, revenue from software sales is no longer being deferred under ASC 606 as recognition is now when control transfers to our contracts. While this assessment continues, we have not yet completed our determinationthe customer. There were no previous period financial statement adjustments.the standard or the effect of these impacts on our consolidated financial statements. Consequently, we have not yet selected a transition method. We expect this determination will near completion in the first half of 2018. Because the new standard will impact our business processes, systems and controls, we are developing a comprehensive change management project plan to guide the implementation.Effective September 30, 2017,ASC 606 adoption for the Company adopted FASB ASU No. 2014-15, Disclosurefor the condensed consolidated statements of Uncertainties about an Entity’s Ability to Continueoperations and balance sheet are as a Going Concern, an amendment of the FASB Accounting Standards Codification. The ASU has added additional disclosure requirements to the codification. It requires management to assess, at each interim and annual reporting period, whether substantial doubt exists about an entity’s ability to continue as a going concern. Substantial doubt exists if it is probable (the “probable” threshold under GAAP has generally been interpreted to be between 75 and 80 percent) that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued (assessment date). This guidance did not have an impact to the Company's consolidated financial statements.follows:July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost and net realizable value, except for inventory measured using last-in, first-out (LIFO) or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017 and requires prospective application, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company has not yet assessed the potential impact of implementing this ASU on our consolidated financial statements.In November 2015, the FASB issued ASU No, 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes, which require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Topic apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Topic. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Beginning October 1, 2017, the Company adopted the ASU and it hasn’t had a material impact on our consolidated financial statements.In FebruaryMay 2016, the FASB issued ASU 2016-02,2016-01, Leases (Topic 842)Financial Instruments – Overall (Subtopic 825-10), , an amendmentwhich included updates to the recognition and measurement of financial assets and liabilities. It also modified the FASB Accounting Standards Codification. This ASU requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. disclosure requirements, which are reflected in Note 19. The new standard is effective forwas adopted by the Company oneffective October 1, 2019. The standard mandates a modified retrospective transition method for all entities2018 and early adoption is permitted. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.In March 2016, the FASB issued ASU No. 2016-08 (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the implementation guidance on principal versus agent considerations. The amendments in this update provides additional guidance on indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer and doesdid not change the core principle of previously issued guidance. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the implementation of this ASU to have a material impact on ourthe consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-09 (Topic 718), Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Additionally, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. The Company has adopted this ASU effective October 1, 2017 and it hasn’t had a material impact on our consolidated financial statements.is evaluatingeffective October 1, 2018 and did not have a material impact on the effect that ASU 2016-15 will have on its consolidated financial statements and related disclosures.statements.is evaluatingeffective October 1, 2018 and did not have a material impact on the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.“BusinessCombinations Clarifying the Definition of a Business" Business (Topic 805)(Topic 805) (“ASU No. 2017-01”). ASU 2017-01 provides a framework to use in determining when a set of assets and activities is a business. ASU 2017-01 provides more consistency in applying the business combination guidance, reduces the costs of application, and makes the definition of a business more operable. ASU 2017-01 is effective for interim and annual periods within those annual periods beginning after December 15, 2017. The new standard was adopted by the Company is currently evaluating theeffective October 1, 2018 and did not have a material impact ASU 2017-01 will have on the Company’s results of operations,consolidated financial position and disclosures.statements.EarlyThe new standard was adopted by the Company effective October 1, 2018 and did not have a material impact on the consolidated financial statements.permittedpermitted. The Company will adopt the new lease guidance using the modified retrospective approach at the period of adoption (October 1, 2019) with no adjustment to prior period disclosures. A package of three practical expedients that is applicable to all leases as lessee or lessor will be adopted. This includes not reassessing whether any expired or existing contracts are or contain leases, not reassessing lease classification for any expired or existing leases, and not reassessing initial direct cost for any existing lease under ASC Topic 840. The Company also elected the practical expedient as a lessee to not separate non-lease components. A material impact on the Company’s consolidated balance sheet is anticipated due to the recognition of the beginning of an annual periodright-of-use assets and lease liabilities for operating leases, which financial statements (interim or annual) haveare currently not been issued or made available for issuance. This ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit costrecorded. There is no material effect anticipated in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.operations. The Company is evaluating the effect that ASU 2017-072016‑02 will have on its consolidated financial statements and related disclosures.InventoriesDiscontinued Operations of TS segment September 30, 2017 September 30, 2016 (Amounts in thousands) Raw materials $ 1,334 $ 1,658 Work-in-process 260 814 Finished goods 4,377 3,108 Total $ 5,971 $ 5,580 Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not been met,approximately $0.4 million and $0.1 million as of September 30, 2017 and September 30, 2016, respectively.3. Effect of Foreign Currency Translation Minimum Pension Liability Accumulated Other Comprehensive Loss (Amounts in thousands) Balance as of September 30, 2015 $ (2,825 ) $ (5,560 ) $ (8,385 ) Change in period 18 (3,413 ) (3,395 ) Tax effect of change in period — (151 ) (151 ) Balance as of September 30, 2016 $ (2,807 ) $ (9,124 ) $ (11,931 ) Change in period (407 ) 1,944 1,537 Tax effect of change in period — 231 231 Balance as of September 30, 2017 $ (3,214 ) $ (6,949 ) $ (10,163 ) gainloss of $389$127 thousand in 20172019 and net gain of $90$151 thousand in 20162018 included in net periodic pension cost.4.Income Taxes For the Years Ended September 30, 2017 2016 (Amounts in thousands) Income before income tax: U.S. $ 3,383 $ 3,418 Foreign 410 182 $ 3,793 $ 3,600 Income tax expense: Current: Federal $ 1,067 $ 303 State 119 118 Foreign 132 159 1,318 580 Deferred: Federal (86 ) 400 State 37 46 Foreign 18 (30 ) (31 ) 416 $ 1,287 $ 996 2017,2019, management assessed the positive and negative evidence in the U.SU.S. operations, and estimated we will have sufficient future taxable income to utilize the existing deferred tax assets, except for certain state net operating losses and taxcarry-forwards.carryforwards. Significant objective positive evidence included the cumulative profits that we realized over the most recent years. This evidence enhances our ability to consider other subjective evidence such as our projections for future growth. Other factors we considered are the likelihood for new revenue from cyber security products, continued royalty income in future years, and our expectation that the TS segment will continue to be profitable in future years. On the basis of this evaluation, as of September 30, 2017,2019, we have concluded that our U.S. deferred tax asset is more likely than not to be realized. It should be noted however, that the amount of the deferred taxlossesloses is present.lossesloses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.Company'sCompany’s effective tax rate and actual income tax expense is as follows: For the Years Ended September 30, 2017 2016 (Dollar amounts in thousands) Computed “expected” tax expense $ 1,289 34.0 % $ 1,224 34.0 % Increases (reductions) in taxes resulting from: State income taxes, net of federal tax benefit 80 2.1 % 124 3.5 % Foreign operations 11 0.3 % 67 1.9 % Permanent differences (4 ) (0.1 )% (20 ) (0.6 )% Change in valuation allowance (37 ) (1.0 )% — — % Uncertain tax liability adjustment 8 0.2 % 8 0.2 % Research & development credit (53 ) (1.4 )% (344 ) (9.6 )% Other items (7 ) (0.2 )% (63 ) (1.7 )% Income tax expense $ 1,287 33.9 % $ 996 27.7 % 20172019 and 2016,2018, temporary differences, which give rise to deferred tax assets (liabilities), are as follows: September 30, 2017 September 30, 2016 (Amounts in thousands) Deferred tax assets: Pension $ 2,470 $ 2,896 Intangibles 219 315 Other reserves and accruals 633 671 Inventory reserves and other 563 470 State credits, net of federal benefit 318 313 Federal and state net operating loss carryforwards 52 61 Foreign net operating loss carryforwards 1,531 1,704 Foreign exchange on intercompany loan (77 ) — Foreign tax credits 7 7 Depreciation and amortization (177 ) (203 ) Gross deferred tax assets 5,539 6,234 Less: valuation allowance (2,712 ) (3,180 ) Realizable deferred tax asset 2,827 3,054 Gross deferred tax liabilities — — Net deferred tax assets $ 2,827 $ 3,054 decreasedincreased by approximately $468$241 thousand, as shown above.which was primarily due to the U. S. valuation allowance on the deferred tax asset for certain state net operating losses carryover. In assessing the realizability of deferred tax assets, the Company considers its taxable future earnings and the expected timing of the reversal of temporary differences. Accordingly, the Company has recorded a valuation allowance which reduces the gross deferred tax asset to an amount which management believes will more likely than not be realized. The valuation allowance was determined by assessing both positive and negative evidence whether it is more likely than not that deferred tax assets are realizable. Such assessment is done on a jurisdiction-by-jurisdiction basis. The Company's inability to project future profitability in certain states beyond fiscal year 20172019 and the cumulative losses incurred in recent years in the U.K. represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets.20172019, and 2016,2018, the Company had U.S. net operating loss carryforwards for state taxfederal purposes of approximately $0.4$2 million and $0.4$1 million, respectively, which are available to offset future taxable income2033.2017,2019, the Company had other state tax credit carryforwards of $55 thousand available to reduce future state tax expense which has unlimited carryover status.2017,2019, the Company concluded that a net increase of $43$241 thousand of the valuation allowanceallowances for the U.S. was appropriate. As part of the Company’s analysis, the Company evaluated, among other factors, its recent history of generating taxable income in state jurisdictions and its near-term forecasts of future taxable income. The net increase in the Company’s valuation allowance of $43$241 thousand is to reserve for certain state net operating losses and state tax credit carryforwards that the Company believes will expire unused.2017,2019, the Company had U.K. net operating loss carryforwards of approximately $9.0$8.2 million that have an indefinite life with no expiration.$2.8$11.0 million and $2.5$12.7 million at September 30, 20172019 and 2016,2018, respectively. The Company's policy is that itsconsidering cash distribution of undistributed foreign earnings are indefinitely reinvestedin the future and accordingly, nowill continue to assess the potential impact of any future distributions on U.S. federalTaxes. The state tax impact of a distribution of foreign earnings and state deferred tax liabilities have been recorded.2017,2019, the total amount of uncertain tax liabilities was $209 thousand. We recognized $7 thousandreversed since the statute of interest andlimitations have expired on the potential penalties accrued related to unrecognizeduncertain tax benefits in our provision for income taxes. For the Year Ended September 30, 2017 For the Year Ended September 30, 2016 (Amounts in thousands) Balance, beginning of year $ 202 $ 195 Accrued penalties and interest 7 7 Balance, end of period $ 209 $ 202 20142015 through 2017,2019, and believes that tax adjustments in any audited year will not be material, except for the uncertain tax position described above.material.On December 20, 2017, the Tax Cuts and Jobs Act bill was passed by Congress. Once the bill is signed into law, the change in the tax law will lower our overall tax rate and reduce our deferred taxes and will be treated as a discrete item in the quarter enacted. We will still need to assess the effect5. September 30, 2017 September 30, 2016 (Amounts in thousands) Leasehold improvements $ 224 $ 263 Equipment 9,055 8,629 Automobiles 74 74 9,353 8,966 Less accumulated depreciation and amortization (7,845 ) (7,286 ) Property, equipment and improvements, net $ 1,508 $ 1,680 $553$405 thousand and $570$506 thousand for the years ended September 30, 20172019 and 2018, respectively. and 2016, respectively.6.. Acquired Intangible Assets20172019 and 2016,2018, intangible assets are as follows: September 30, 2017 September 30, 2016 Weighted Average Remaining Amortization Period Gross Accumulated Amortization Net Weighted Average Remaining Amortization Period Gross Accumulated Amortization Net (Amounts in thousands) Customer list 2 years $ 910 $ 773 $ 137 3 years $ 910 $ 682 $ 228 Non-compete agreements 0 years 93 93 — 0 years 93 93 — Developed technology 0 years 30 $ 30 $ — 0 years 30 29 1 Trade name 1 year 140 $ 110 $ 30 2 years 140 82 58 Total $ 1,173 $ 1,006 $ 167 $ 1,173 $ 886 $ 287 $120$11 thousand and $129$119 thousand for fiscal 20172019 and 2016,2018, respectively.(Amounts in thousands) 2018 119 2019 11 2020 9 2021 9 2022 9 Thereafter 10 Total $ 167 7. September 30, 2017 2016 (Amounts in thousands) Accounts payable $ 10,941 $ 4,360 Inventory line of credit 3,110 3,151 Commissions 269 269 Compensation and fringe benefits 2,147 2,139 Professional fees and shareholders' reporting costs 789 594 Taxes, other than income 866 353 Warranty 121 131 Other 602 935 $ 18,845 $ 11,932 8. 2017 2016 $ 130,841 $ 125,423 75,816 52,066 (85,207 ) (46,648 ) $ 121,450 $ 130,841 9.In 1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), and authorized 199,650 shares of common stock to be reserved for issuance pursuant to the 1997 Plan. The 1997 plan expired in 2007. Because the 1997 Plan has expired, no further awards will be issued under this plan. In 2003, the Company adopted the 2003 Stock Incentive Plan (the “2003 Plan”) and authorized 200,000 shares of common stock to be reserved for issuance pursuant to the 2003 Plan. The 2003 plan expired in 2013. Because the 2003 Plan has expired, no further awards will be issued under this plan. In 2007, the Company adopted the 2007 Stock Incentive Plan (the “2007 Plan”) and authorized 250,000 shares of common stock to be reserved for issuance pursuant to the 2007 Plan. The 2007 plan expired in 2017. Because the 2007 Plan has expired, no further awards will be issued under this plan. “2015 Plan”"2015 Plan") and authorized2017,2019, there were 183,965320,715 shares available to be granted under the 2015 Plan. Under all of the stock incentive plans, both incentive stock options and non-qualified stock options may be granted to officers, key employees and other persons providing services to the Company. The 2003 Plan and 2007 Plan also provide for awards of nonvested shares of common stock. All of the Company'sCompany’s stock incentive plans have a ten year life. The total number of available shares under all plans for future awards was 183,965 as of September 30, 2017.Company'sCompany’s stock incentive plans is determined by the Company'sCompany’s compensation committee. Generally, options granted to employees vest over four years and expire ten years from the date of grant. Options granted to non-employee directors have historically included cliff vesting after six months from the date of grant and expire three years from the date of grant. In fiscal years 20152016 through 2017,2019, the Company granted certain officers including its Chief Executive Officer and non-employee directors, and key employees shares of nonvested common stock instead of stock options. The vesting periods for the officers'officers’, the Chief Executive Officer'sOfficer’s and the directors'non-employee directors’ nonvested stock awards are four years, three years and one year, respectively. The vesting period for the key employees'employees’ awards is four years.20172019 and 20162018 related to stock options and nonvested stock granted to employees and non-employee directors under the Company'sCompany’s stock incentive and employee stock purchase plans totaled approximately $577$792 thousand and $414$691 thousand, respectively. The classification of the cost of stock-based compensation, in the consolidated statements of operations, is consistent with the nature of the services being rendered in exchange for the share based payment.Company'sCompany’s consolidated statements of operations: Years ended September 30, 2017 September 30, 2016 (Amounts in thousands) Cost of sales $ 6 $ 2 Engineering and development 24 6 Selling, general and administrative 547 406 Total $ 577 $ 414 2017,2019, the Company granted 34,00033,000 nonvested shares to certain key employees, 40,00055,000 nonvested shares to certain officers including 30,00035,000 shares granted to the Chief Executive Officer, and 20,000 nonvested shares to its non-employee directors. For the year ended September 30, 2016,2018, the Company granted 28,00012,000 nonvested shares to certain key employees, 57,00040,000 nonvested shares to certain officers including 40,00030,000 to its Chief Executive Officer and 20,39520,000 nonvested shares to its non-employee directors.Company'sCompany’s stock price, the weighted average risk-free interest rate and the weighted average expected life of the options, at the time of grant. The expected dividend yield is equal to the divided per share declared, divided by the closing share price on the date the options were granted. All equity compensation awards granted for the years ended September 30, 20172019 and September 30, 20162018 were nonvested stock awards.20172019 and 20162018 were based on actual forfeitures.2017. Outstanding at September 30, 2015 55,126 $ 6.43 — — Granted — — — — Expired (17,500 ) $ 6.61 — — Forfeited — — — — Exercised (14,000 ) 6.20 — — Outstanding at September 30, 2016 23,626 $ 5.76 — — Granted — — — — Expired (9,250 ) $ 9.30 — — Forfeited — — — — Exercised (5,000 ) 2.99 — — Outstanding at September 30, 2017 9,376 $ 4.49 1.35 Years $ 62 Exercisable at September 30, 2017 9,376 $ 4.49 1.35 Years $ 62 Vested and expected to vest at September 30, 2017 9,376 $ 4.49 1.35 Years $ 62 20172019 and 2016.2018. The aggregate intrinsic value of stock options exercised during the years ended September 30, 20172019 and 20162018 was $38$8 thousand and $51$34 thousand, respectively.Therespectively.The following table provides summary data of nonvested stock award activity: Nonvested shares outstanding at September 30, 2015 130,457 $ 6.08 2.12 Years $ 714 Activity in 2016: Granted 105,395 $ 6.47 — — Vested (48,444 ) $ 6.33 — — Forfeited (21,700 ) 7.38 — — Nonvested shares outstanding at September 30, 2016 165,708 $ 6.38 2.20 Years $ 1,695 Activity in 2017: Granted 94,000 $ 10.18 — — Vested (71,587 ) $ 6.59 — — Forfeited (8,300 ) 7.11 — — Nonvested shares outstanding at September 30, 2017 179,821 $ 8.64 2.23 Years $ 1,987 Vested at September 30, 2017 250,864 $ 5.96 0.31 Years $ 2,772 Vested and expected to vest at September 30, 2017 430,685 $ 7.08 1.11 Years $ 4,759 2017,2019, there was $1.09$1.4 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements (including stock option and nonvested stock awards) granted under the Company'sCompany’s stock incentive plans. This cost is expected to be expensed over a weighted average period of approximately 2.682.50 years. The total fair value of shares vested during the years ended September 30, 20172019 and 20162018 was $472$716 thousand and $307$662 thousand, respectively.10."ESPP”"ESPP"), which was ratified by a vote of the Company'sCompany’s shareholders in February 2014. Under the ESPP, the Company’s employees may purchase shares of common stock at a price per share that is currently 95% of the lesser of the fair market value as of the beginning or end of semi-annual option periods. Pursuant to the ESPP, the Company issued 22,99629,238 and 33,24822,895 shares for the two years ended September 30, 20172019 and September 30, 2016,2018, respectively. Since inception of the plan, there are 149,086 shares available for future issuance under the ESPP as of September 30, 2017.11., Germany and in the U.S. In the U.K. and Germany,, the Company provides defined benefit pension plans for certain employees and former employees and defined contribution plans for the majority of the employees. The defined benefit plans in both the U.K. and Germany are closed to newly hired employees and have been for the two years ended September 30, 2017.2019. In the U.S., the Company also provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who are now retired. These supplementary retirement plans are also closed to newly hired employees and have been for the two years ended September 30, 2017.2019. These supplementary plans are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and not assets of the defined benefit plans. In the U.S., the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain officers. The Company also funds these supplemental plans'plans’ obligations through whole life insurance policies on the officers.The German Plan does not have any assets and therefore all costs and benefits of the plan are funded annually with cash flow from operations.$2.1$2.2 million and $1.9$2.1 million as of September 30, 20172019 and 2016,2018, respectively. The loans against the policies have been taken out by the Company to pay the premiums. The costs and benefit payments for these plans are paid through operating cash flows of the Company to the extent that they cannot be funded through the use of the cash values in the insurance policies. The Company expects that the recorded value of the insurance policies will be sufficient to fund all of the Company'sCompany’s obligations under these plans.Assumptions: 2017 2016 2017 2016 Discount rate: 3.75 % 3.50 % 2.34 % 1.77 % Expected return on plan assets: 3.70 % 3.60 % Rate of compensation increase: 1.00 % 1.00 % 2017 2016 2017 2016 Discount rate: 3.50 % 4.25 % 1.77 % 3.10 % Expected return on plan assets: 3.60 % 4.20 % Rate of compensation increase: 1.00 % 1.00 % Citigroup Pension Discount Curve and Liability IndexFTSE pension liability index for AA rated corporate instruments. The Company monitors other indices to assure that the pension obligations are fairly reported on a consistent basis. The international discount rates were determined by comparison against country specific AA corporate indices, adjusted for duration of the obligation. 2017 2016 (amounts in thousands) Pension: Service cost $ 41 $ — $ 41 $ 35 $ — $ 35 Interest cost 386 29 415 571 43 614 Expected return on plan assets (268 ) — (268 ) (357 ) — (357 ) Amortization of net (gain)/loss 370 4 374 174 (5 ) 169 Net periodic benefit cost $ 529 $ 33 $ 562 $ 423 $ 38 $ 461 Post Retirement: Service cost $ — $ 38 $ 38 $ — $ 27 $ 27 Interest cost — 44 44 — 42 42 Amortization of net (gain)/loss — 15 15 — (79 ) (79 ) Net periodic benefit cost $ — $ 97 $ 97 $ — $ (10 ) $ (10 ) Pension: Increase (decrease) in minimum liability included in other comprehensive income (loss) $ (1,831 ) $ (14 ) $ (1,845 ) $ 3,105 $ 25 $ 3,130 Post Retirement: Increase (decrease) in minimum liability included in other comprehensive income (loss) — (99 ) (99 ) — 283 283 Total: Increase (decrease) in minimum liability included in comprehensive income (loss) $ (1,831 ) $ (113 ) $ (1,944 ) $ 3,105 $ 308 $ 3,413 20172019 and 20162018 of the benefit obligation, the plan assets and the funded status of the plans: 2017 2016 (Amounts in thousands) Pension: Change in projected benefit obligation (“PBO”) Balance beginning of year $ 19,564 $ 829 $ 20,393 $ 17,979 $ 1,022 $ 19,001 Service cost 42 — 42 35 — 35 Interest cost 386 29 415 571 43 614 Changes in actuarial assumptions (1,582 ) (9 ) (1,591 ) 3,948 20 3,968 Foreign exchange impact 651 — 651 (2,069 ) — (2,069 ) Benefits paid (402 ) (172 ) (574 ) (900 ) (256 ) (1,156 ) Projected benefit obligation at end of year $ 18,659 $ 677 $ 19,336 $ 19,564 $ 829 $ 20,393 Changes in fair value of plan assets: Fair value of plan assets at beginning of year $ 7,629 $ — $ 7,629 $ 9,301 $ — $ 9,301 Actual gain on plan assets 368 — 368 111 — 111 Company contributions 376 172 548 406 256 662 Foreign exchange impact 268 — 268 (1,289 ) — (1,289 ) Benefits paid (402 ) (172 ) (574 ) (900 ) (256 ) (1,156 ) Fair value of plan assets at end of year $ 8,239 $ — $ 8,239 $ 7,629 — $ 7,629 Funded status \ net amount recognized $ (10,420 ) $ (677 ) $ (11,097 ) $ (11,935 ) $ (829 ) $ (12,764 ) Post Retirement: Change in projected benefit obligation (“PBO”): Balance beginning of year $ — $ 1,257 $ 1,257 $ — $ 985 $ 985 Service cost — 38 38 — 27 27 Interest cost — 44 44 — 42 42 Changes in actuarial assumptions — (84 ) (84 ) — 203 203 Projected benefit obligation at end of year $ — $ 1,255 $ 1,255 $ — $ 1,257 $ 1,257 Funded status \ net amount recognized $ — $ (1,255 ) $ (1,255 ) $ — $ (1,257 ) $ (1,257 ) 2017 2016 (Amounts in thousands) Pension: Accrued benefit liability $ (10,420 ) $ (677 ) $ (11,097 ) $ (11,936 ) $ (829 ) $ (12,765 ) Deferred tax (493 ) 19 (474 ) (216 ) 14 (202 ) Accumulated other comprehensive income 6,893 18 6,911 9,001 26 9,027 Net amount recognized $ (4,020 ) $ (640 ) $ (4,660 ) $ (3,151 ) $ (789 ) $ (3,940 ) Post Retirement: Accrued benefit liability $ — $ (1,255 ) $ (1,255 ) $ — $ (1,257 ) $ (1,257 ) Deferred tax — 91 91 — 52 52 Accumulated other comprehensive income (loss) — 38 38 — 97 97 Net amount recognized $ — $ (1,126 ) $ (1,126 ) $ — $ (1,108 ) $ (1,108 ) Total pension and post retirement: Accrued benefit liability $ (10,420 ) $ (1,932 ) $ (12,352 ) $ (11,936 ) $ (2,086 ) $ (14,022 ) Deferred tax (493 ) 110 (383 ) (216 ) 66 (150 ) Accumulated other comprehensive income 6,893 56 6,949 9,001 123 9,124 Net amount recognized $ (4,020 ) $ (1,766 ) $ (5,786 ) $ (3,151 ) $ (1,897 ) $ (5,048 ) Accumulated Benefit Obligation: Pension $ (18,514 ) $ (677 ) $ (19,191 ) $ (19,396 ) $ (829 ) $ (20,225 ) Post Retirement — (1,255 ) (1,255 ) — (1,257 ) (1,257 ) Total accumulated benefit obligation $ (18,514 ) $ (1,932 ) $ (20,446 ) $ (19,396 ) $ (2,086 ) $ (21,482 ) our German plans which are legally not required to be funded and our U.K. retirement plan. 2017 2016 (Amounts in thousands) Current accrued benefit liability $ 534 $ 581 Non-current accrued benefit liability 11,818 13,441 Total accrued benefit liability $ 12,352 $ 14,022 20172019 and 2016,2018, the amounts included in accumulated other comprehensive income, consisted of deferred net losses totaling approximately $6.9$6.3 million and $9.1$5.3 million, respectively.gainloss expected to be recognized as a component of net periodic benefit cost for the year ending September 30, 2018,2019, is approximately $186$229 thousand.$0.5$0.4 million to its pension plans for fiscal 2018.2020. (Amounts in thousands) 2018 $ 606 2019 651 2020 667 2021 691 2022 724 Thereafter 4,225 2017,2019, our pension plan in the U.K. was the only plan with assets, holding investments of approximately $8.2 million. Pension plan assets are managed by a fiduciary committee. The Company'sCompany’s investment strategy for pension plan assets is to maximize the long-term rate of return on plan assets within an acceptable level of risk while maintaining adequate funding levels. Local regulations, local funding rules, and local financial and tax considerations are part of the funding and investment process. In deciding on the investments to be held, the trustees take into account the risk of possible fluctuations in income from, and market values of, the assets as well as the risk of departing from an asset profile which broadly matches the liability profile. The committee has invested the plan assets in a single pooled fund with an authorized investment company (the “Fund”). The Fund selected by the trustees is consistent with the plan'splan’s overall investment principles and strategy described herein. There are no specific targets as to asset allocation other than those contained within the Fund that is managed by the authorized investment company. Fair Values as of September 30, 2017 September 30, 2016 Fair Value Measurements Using Inputs Considered as Fair Value Measurements Using Inputs Considered as Asset Category Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 (Thousands) Cash on deposit $ 62 $ 62 $ — $ — $ 86 $ 86 $ — $ — Pooled funds 8,177 8,177 — — 7,543 7,543 — — Total plan assets $ 8,239 $ 8,239 $ — $ — $ 7,629 $ 7,629 $ — $ — employee'semployee’s contributions and may make discretionary contributions to the plans. The Company'sCompany’s contributions were $152178 thousand and $129$204 thousand for the years ended September 30, 20172019 and 2016,2018, respectively.2017 and September 30, 2016,2018, the Company maintained a line of credit note that allows for borrowings of up to $1.0 million. Availability under thisthe facility iswas reduced by outstanding borrowings thereunder. The interest rates on outstanding borrowings is thewas London Inter-Bank Offer Rate (“LIBOR”("LIBOR") plus 2.5%, with a floor of 4%. Borrowings under the credit agreementagreements are required to be repaid on demand by the lender in some cases,certain circumstances, upon termination of the agreements, or may be prepaid by the Company without penalty. The credit agreement is not subject to financial covenants and the Company did not borrowhad no amounts outstanding under the line of credit during the fiscal yearsyear ending September 30, 2017 and 2016.20172019 and September 30, 2016,2018, the Company also maintained an inventory line of credit that may be used by the TS divisionsegment in the U.S. to purchase inventory from approved vendors with payment terms which exceed those offered by the vendors. In fiscal year 2019, HPP gained access to this inventory line of credit, but did not use it in fiscal year 2019. No interest accrues under the inventory line of credit when advances are paid within terms, however, late payments are subject to an interest charge of Prime plus 5%. The credit agreements containagreement for the inventory line of credit contains financial covenants which require the Company to maintain the following division specificTS segment-specific financial ratios: (1) a minimum current ratio of 1.2, (2) tangible net worth of $2.5no less than $4.0 million, and (3) a maximum ratio of total liabilities to total net worth of less than 5.0:1. As of September 30, 20172019 and September 30, 2016,2018, Company borrowings under the inventory line of credit were $3.1$2.5 million and $3.2 million, respectively, which is included as a component of accounts payable and accrued expenses on the accompanying consolidated balance sheets.13.Company was in compliance with all covenants.ten years.two years, which all have renewal options and escalation clauses. The leases are classified as operating leases and provide for the payment of real estate taxes, insurance, utilities and maintenance. (Amounts in thousands) 2018 $ 852 2019 735 2020 609 2021 295 2022 201 $ 2,692 $1.0$0.7 million in 20172019 and $1.2$0.8 million in 2016.2018.Company'sCompany’s Board of Directors passes resolutions to authorize the Company to purchase shares of its outstanding common stock. The Company did not repurchase any shares during the years ended years ended September 30, 20172019 and 2016.2018. As of September 30, 2017,2019, the Company is authorized to repurchase an additional 201 thousand shares pursuant to such resolutions.14. TS Segment For the Years Ended September 30, Germany U.S. Total (Amounts in thousands) 2017 Sales: Product $ 7,608 $ 8,322 $ 10,727 $ 58,018 $ 77,067 $ 84,675 Service 6,236 14,668 763 5,140 20,571 26,807 Total sales 13,844 22,990 11,490 63,158 97,638 111,482 Profit (loss) from operations 1,467 377 (30 ) 1,958 2,305 3,772 Assets 17,782 17,055 6,878 17,213 41,146 58,928 Capital expenditures 99 151 — 108 259 358 Depreciation and amortization 224 188 9 252 449 673 2016 Sales: Product $ 11,190 $ 4,863 $ 7,066 $ 54,716 $ 66,645 $ 77,835 Service 5,152 15,130 925 4,325 20,380 25,532 Total sales 16,342 19,993 7,991 59,041 87,025 103,367 Profit (loss) from operations 1,464 676 (363 ) 2,024 2,337 3,801 Assets 17,717 13,751 3,748 13,491 30,990 48,707 Capital expenditures 227 322 97 89 508 735 Depreciation and amortization 232 158 79 230 467 699 Company'sCompany’s sales by operating segment for fiscal years ended September 30, 20172019 and 2016.2018. The Company'sCompany’s sales by geographic area based on the location of where the products were shipped or services rendered are as follows:2017 (Amounts in thousands) HPP $ 10,340 $ 1,437 $ 2,067 $ 13,844 12 % TS 59,642 36,060 1,936 97,638 88 % Total $ 69,982 $ 37,497 $ 4,003 $ 111,482 100 % % of Total 63 % 34 % 3 % 100 % 2016 HPP $ 11,417 $ 1,584 $ 3,341 $ 16,342 16 % TS 59,698 26,376 951 87,025 84 % Total $ 71,115 $ 27,960 $ 4,292 $ 103,367 100 % % of Total 69 % 27 % 4 % 100 % 20172019 and 20162018 were as follows: September 30, 2017 September 30, 2016 (Amounts in thousands) North America $ 1,078 $ 1,348 Europe 597 619 Totals $ 1,675 $ 1,967 20172019 and 20162018 were as follows: September 30, 2017 September 30, 2016 (Amounts in thousands) North America $ 1,962 $ 1,990 Europe 865 1,064 Totals $ 2,827 $ 3,054 20172019 and 2016.2018. For the years ended September 30, 2017 September 30, 2016 Amount Amount (Amounts in millions) Customer A $ 22.1 20 % $ 19.6 19 % Customer B $ 11.1 10 % $ 13.2 13 % $2.4$0.3 million, or 9%1%, and approximately $3.0$1.1 million, or 15%9%, of total consolidated accounts receivable as of September 30, 20172019 and September 30, 2016,2018, respectively. Accounts receivable and long term receivable from Customer B totaled approximately $3.9$7.4 million, or 14%36%, and approximately $2.5$0.2 million, or 13%2%, of total consolidated accounts receivable as of September 30, 20172019 and September 30, 2016, respectively.Two additional customers, C and D, accounted for accounts receivable of 10% or more but did not account for sales of 10% or more. Accounts receivable from Customer C totaled approximately $4.5 million, or 16%, and approximately $1.5 million, or 8%, of total consolidated accounts receivable as of September 30, 2017 and September 30, 2016, respectively. Accounts receivable from Customer D totaled approximately $4.2 million, or 15%, and approximately $0.7 million, or 3%, of total consolidated accounts receivable as of September 30, 2017 and September 30, 2016,2018, respectively. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with these customers as of September 30, 2017.2019. No other customers accounted for 10% or more of total consolidated accounts receivable as of September 30, 2017 or September 30, 2016.2019.Measures20172019 or September 30, 2016, except for pension plan assets values,2018.discussed in classified within Level 2. If the preceding information is unavailable, we use internally generated data to estimate fair value which is classified within Level 3.11.30,201730, 2019 and 2016,2018, the Company declared and paid cash dividends as follows:Fiscal Year Date Declared Record Date Date Paid Amount Paid Per Share 2016 12/23/2015 12/31/2015 1/11/2016 $0.11 2016 2/16/2016 2/26/2016 3/11/2016 $0.11 2016 5/11/2016 5/27/2016 6/10/2016 $0.11 2016 8/18/2016 8/31/2016 9/9/2016 $0.11 2017 1/12/2017 1/27/2017 2/8/2017 $0.11 2017 2/23/2017 3/3/2017 3/17/2017 $0.11 2017 5/24/2017 6/1/2017 6/15/2017 $0.11 2017 8/14/2017 8/21/2017 9/5/2017 $0.11 17. Related Party TransactionsDuring the normal course of business, the Company sold products to a company whose Board of Directors included two members of CSP Inc.'s Board of Directors. The total sales were $283 thousand for the fiscal year ended 2016. The trade receivable was $64 thousand thousand as of September 30, 2016. CSP Inc's two board members were no longer board members of the same company at the end of fiscal year 2017.18. Subsequent EventsOn December 20, 2017, the Tax Cuts and Jobs Act bill was passed by Congress. Once the bill is signed into law, the change in the tax law will lower our overall tax rate and reduce our deferred taxes and will be treated as a discrete item in the quarter enacted. We will still need to assess the effect of the new law when enacted on our effective tax rate.61