‎UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________

FORM 10-Q

_____________________________________________________

(Mark One)

	☒
	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2020~~2021

	☐
	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to______to _____

Commission File Number: 001-31588

COMMUNICATIONS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

~~MINNESOTA~~	~~41-0957999~~
MINNESOTA		41-0957999
(State or other jurisdiction of incorporation or organization)		(Federal Employer Identification No.)
~~incorporation or organization)~~	~~Identification No.)~~

10900 Red Circle Drive, Minnetonka, MN		55343
(Address of principal executive offices)		(Zip Code)

(952) 996-1674

Registrant’s telephone number, including area code

Securities Registered Pursuant to Section 12(b) of the Act

Title of Each Class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value , $.05 per share	JCS	Nasdaq

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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by a 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-2 of the Exchange Act.

Large Accelerated Filer ☐ Accelerated Filer ☐ ~~Non-Accelerated~~ 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-2 of the Exchange Act. YES ☐ NO ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Outstanding at November 1, ~~2020~~2021	~~9,320,475~~9,720,627

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

INDEX

~~INDEX~~

			Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets			3 2

	Condensed Consolidated Statements of Income (Loss) and Comprehensive Income ~~(Loss)~~(Loss)			4 3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity			5 4

	Condensed Consolidated Statements of Cash Flows			7 6

	Notes to Condensed Consolidated Financial Statements			8 7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23 24

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33

	Item 4.	Controls and Procedures		34 33

Part II.	Other Information			35 34

SIGNATURES CERTIFICATIONS				36
~~CERTIFICATIONS~~

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS

September 30 December 31
2020 2019
CURRENT ASSETS:
Cash and cash equivalents $ 9,123,704 $ 13,928,504
Restricted cash 251,642 679,006
Investments 5,264,774 9,449,650
Trade accounts receivable, less allowance for doubtful accounts of $161,000 and $154,000, respectively 10,360,155 10,242,405
Inventories 9,831,656 8,531,112
Prepaid income taxes 88,580 72,994
Other current assets 1,335,649 1,160,865
Current assets held for sale — 5,337,274
  TOTAL CURRENT ASSETS 36,256,160 49,401,810

PROPERTY, PLANT AND EQUIPMENT,  net 7,302,577 8,238,089
OTHER ASSETS:
Investments 7,566,900 250,000
Goodwill 1,370,918 —
Deferred income taxes — 9,534
Operating lease right of use asset 463,563 367,909
Intangible assets 2,123,667 —
Other assets, net 187,524 —
Non-current assets held for sale 445,687 883,370
TOTAL OTHER ASSETS 12,158,259 1,510,813
TOTAL ASSETS $ 55,716,996 $ 59,150,712
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,112,381 $ 3,720,445
Accrued compensation and benefits 2,622,292 3,517,331
Operating lease liability 204,255 115,935
Other accrued liabilities 1,606,339 2,602,752
Dividends payable 16,637 200,363
Deferred revenue 219,695 —
Current liabilities held for sale — 1,193,218
TOTAL CURRENT LIABILITIES 7,781,599 11,350,044
LONG TERM LIABILITIES:
Long-term compensation plans 66,137 164,348
Operating lease liability 252,543 244,038
Deferred revenue 374,686 —
TOTAL LONG-TERM LIABILITIES 693,366 408,386
COMMITMENTS AND CONTINGENCIES  (Footnote 8)
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued
Common stock, par value $.05 per share; 30,000,000 shares authorized; 9,313,164 and 9,252,749 shares issued and outstanding, respectively 465,658 462,637
Additional paid-in capital 43,401,673 42,977,914
Retained earnings 4,138,023 4,649,395
Accumulated other comprehensive loss (763,323 ) (697,664 )
TOTAL STOCKHOLDERS’ EQUITY 47,242,031 47,392,282
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 55,716,996 $ 59,150,712

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

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)

Three Months Ended September 30 Nine Months Ended September 30
2020 2019 2020 2019

Sales $ 12,109,529 $ 13,622,120 $ 30,900,223 $ 35,542,758
Cost of sales 6,927,701 7,337,203 18,501,200 20,391,087
Gross profit 5,181,828 6,284,917 12,399,023 15,151,671
Operating expenses:
Selling, general and administrative expenses 4,804,492 5,513,119 14,477,050 16,330,583
Acquisition costs 71,301 — 485,886 —
Total operating expenses 4,875,793 5,513,119 14,962,936 16,330,583
Operating income (loss) from continuing operations 306,035 771,798 (2,563,913 ) (1,178,912 )
Other income (expenses):
Investment and other income 263,660 108,349 663,898 229,981
Gain (loss) on sale of assets — (10,217 ) 308,403 (20,152 )
Interest and other expense (7,060 ) (9,696 ) (26,151 ) (28,734 )
Other income, net 256,600 88,436 946,150 181,095
Operating income (loss) from continuing operations before income taxes 562,635 860,234 (1,617,763 ) (997,817 )
Income tax expense (benefit) 8,952 (26,788 ) 4,049 (42,629 )
Net income (loss) from continuing operations 553,683 887,022 (1,621,812 ) (955,188 )
Net (loss) income from discontinued operations, net of tax (291,318 ) 850,837 1,453,289 5,706,338
Net income (loss) 262,365 1,737,859 (168,523 ) 4,751,150

Other comprehensive income (loss), net of tax:
Unrealized gain on available-for-sale securities (15,897 ) (925 ) (5,800 ) (522 )
Foreign currency translation adjustment 81,146 (63,037 ) (59,859 ) (82,085 )
Total other comprehensive income (loss) 65,249 (63,962 ) (65,659 ) (82,607 )
Comprehensive income (loss) $ 327,614 $ 1,673,897 $ (234,182 ) $ 4,668,543

Basic net income (loss) per share:
Continuing operations $ 0.06 $ 0.10 $ (0.17 ) $ (0.11 )
Discontinued operations (0.03 ) 0.09 0.15 0.62
$ 0.03 $ 0.19 $ (0.02 ) $ 0.51

Diluted net income (loss) per share:
Continuing operations $ 0.06 $ 0.10 $ (0.17 ) $ (0.10 )
Discontinued operations (0.03 ) 0.09 0.15 0.61
$ 0.03 $ 0.19 $ (0.02 ) $ 0.51

Weighted Average Basic Shares Outstanding 9,355,425 9,317,129 9,323,902 9,270,125
Weighted Average Dilutive Shares Outstanding 9,444,986 9,368,171 9,323,902 9,278,803
Dividends declared per share $ — $ 0.02 $ 0.04 $ 0.06

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

~~COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~(Unaudited)~~

~~For the Nine Months Ended September 30, 2020~~

Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss Total
BALANCE AT DECEMBER 31, 2019 9,252,749 $ 462,637 $ 42,977,914 $ 4,649,395 $ (697,664 ) $ 47,392,282
Net loss — — — (168,523 ) — (168,523 )
Issuance of common stock under Employee Stock Purchase Plan 12,968 648 66,246 — — 66,894
Issuance of common stock to Employee Stock Ownership Plan 66,059 3,303 404,281 — — 407,584
Issuance of common stock under Executive Stock Plan 64,352 3,218 20,720 — — 23,938
Share based compensation — — 319,777 — — 319,777
Other share retirements (82,964 ) (4,148 ) (387,265 ) 37,192 — (354,221 )
Shareholder dividends ($0.04 per share) — — — (380,041 ) — (380,041 )
Other comprehensive loss — — — — (65,659 ) (65,659 )
BALANCE AT SEPTEMBER 30, 2020 9,313,164 $ 465,658 $ 43,401,673 $ 4,138,023 $ (763,323 ) $ 47,242,031

~~For the Three Months Ended September 30, 2020~~

Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss Total
BALANCE AT JUNE 30, 2020 9,351,486 $ 467,573 $ 43,495,046 $ 3,830,132 $ (828,572 ) $ 46,964,179
Net income — — — 262,365 — 262,365
Issuance of common stock under Employee Stock Purchase Plan 4,899 245 24,593 — — 24,838
Issuance of common stock under Executive Stock Plan 15,768 789 15,540 — — 16,329
Share based compensation — — 143,150 — — 143,150
Other share retirements (58,989 ) (2,949 ) (276,656 ) 44,309 — (235,296 )
Shareholder dividends ($0.00 per share) — — — 1,217 — 1,217
Other comprehensive income — — — — 65,249 65,249
BALANCE AT SEPTEMBER 30, 2020 9,313,164 $ 465,658 $ 43,401,673 $ 4,138,023 $ (763,323 ) $ 47,242,031

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

~~For the Nine Months Ended September 30, 2019~~

Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss Total
BALANCE AT DECEMBER 31, 2018 9,158,438 $ 457,922 $ 42,680,499 $ (734,001 ) $ (751,293 ) $ 41,653,127
Net income — — — 4,751,150 — 4,751,150
Issuance of common stock under Employee Stock Purchase Plan 29,686 1,484 71,818 — — 73,302
Issuance of common stock to Employee Stock Ownership Plan 132,826 6,641 262,995 — — 269,636
Issuance of common stock under Executive Stock Plan 27,075 1,354 80,100 — — 81,454
Share based compensation — — 276,236 — — 276,236
Other share retirements (39,205 ) (1,960 ) (182,623 ) (11,659 ) — (196,242 )
Shareholder dividends ($0.06 per share) — — — (569,645 ) — (569,645 )
Other comprehensive loss — — — — (82,607 ) (82,607 )
BALANCE AT SEPTEMBER 30, 2019 9,308,820 $ 465,441 $ 43,189,025 $ 3,435,845 $ (833,900 ) $ 46,256,411

~~For the Three Months Ended September 30, 2019~~

Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss Total
BALANCE AT JUNE 30, 2019 9,316,576 $ 465,829 $ 43,176,179 $ 1,901,373 $ (769,938 ) $ 44,773,443
Net income — — — 1,737,859 — 1,737,859
Issuance of common stock under Employee Stock Purchase Plan 8,209 410 24,298 — — 24,708
Issuance of common stock under Executive Stock Plan 22,500 1,125 80,100 — — 81,225
Share based compensation — — 87,649 — — 87,649
Other share retirements (38,465 ) (1,923 ) (179,201 ) (13,153 ) — (194,277 )
Shareholder dividends ($0.02 per share) — — — (190,234 ) — (190,234 )
Other comprehensive loss — — — — (63,962 ) (63,962 )
BALANCE AT SEPTEMBER 30, 2019 9,308,820 $ 465,441 $ 43,189,025 $ 3,435,845 $ (833,900 ) $ 46,256,411

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

~~COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited)~~

Nine Months Ended September 30
2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (168,523 ) $ 4,751,150
Net income from discontinued operations, net of tax 1,453,289 5,706,338
Net loss from continuing operations (1,621,812 ) (955,188 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization 740,531 806,169
Share based compensation 319,777 276,236
Deferred taxes 9,534 —
(Gain) loss on sale of assets (303,899 ) 20,152
Changes in assets and liabilities:
Trade accounts receivable 54,701 (402,333 )
Inventories (1,230,228 ) 2,258,386
Prepaid income taxes (15,587 ) 65,772
Other assets, net (21,031 ) (43,385 )
Accounts payable (655,111 ) (421,309 )
Accrued compensation and benefits (663,272 ) 404,422
Other accrued liabilities (666,979 ) 158,112
Income taxes payable — (28,267 )
Net cash (used in) provided by operating activities - continuing operations (4,053,376 ) 2,138,767
Net cash (used in) provided by operating activities - discontinued operations (1,526,458 ) 3,669,947
Net cash (used in) provided by operating activities (5,579,834 ) 5,808,714
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (182,842 ) (326,291 )
Acquisition of business, net of cash acquired (3,975,894 ) —
Purchases of investments (18,415,534 ) (8,593,711 )
Proceeds from the sale of property, plant and equipment 420,000 —
Proceeds from the sale of investments 15,277,710 3,090,437
Net cash used in investing activities - continuing operations (6,876,560 ) (5,829,565 )
Net cash provided by investing activities - discontinued operations 8,059,110 4,903,856
Net cash provided by (used in) investing activities 1,182,550 (925,709 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (563,766 ) (556,966 )
Proceeds from issuance of common stock, net of shares withheld 90,832 (41,486 )
Purchase of common stock (354,221 ) —
Net cash used in financing activities (827,155 ) (598,452 )
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (7,725 ) (41,789 )

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (5,232,164 ) 4,242,764

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD 14,607,510 11,056,426
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $ 9,375,346 $ 15,299,190
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid (refunded) $ 10,102 $ (73,151 )
Interest paid 25,387 28,508
Dividends declared not paid 16,637 197,220
Capital expenditures in accounts payable — —
Operating right of use assets obtained in exchange for lease obligations 208,650 449,995

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



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS
			Audited
	September 30			December 31
	2021			2020
CURRENT ASSETS:
Cash and cash equivalents	$	35,284,786		$	12,789,975
Investments		2,861,394			2,759,024
Trade accounts receivable, less allowance for
doubtful accounts of $33,000 and $14,000, respectively		2,119,022			4,402,023
Inventories, net		121,098			136,264
Prepaid income taxes		15,910			35,948
Other current assets		1,068,799			556,953
Current assets held for sale		-			15,078,066
TOTAL CURRENT ASSETS		41,471,009			35,758,253
PROPERTY, PLANT AND EQUIPMENT, net		5,800,827			6,087,975
OTHER ASSETS:
Investments		3,942,825			7,109,212
Goodwill		2,086,393			2,086,393
Operating lease right of use asset		191,134			284,251
Intangible assets, net		2,440,562			2,775,361
Other assets, net		183,373			171,619
Non-current assets held for sale		846,000			1,283,261
TOTAL OTHER ASSETS		9,690,287			13,710,097
TOTAL ASSETS	$	56,962,123		$	55,556,325
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,716,451		$	709,283
Accrued compensation and benefits		1,247,228			1,531,595
Operating lease liability		132,690			127,243
Other accrued liabilities		203,203			318,650
Accrued consideration		—			550,000
Dividends payable		34,022,195			16,147
Deferred revenue		608,712			456,912
Current liabilities held for sale		—			3,727,821
TOTAL CURRENT LIABILITIES		37,930,479			7,437,651
LONG TERM LIABILITIES:
Long-term compensation plans		—			116,460
Operating lease liability		69,613			167,697
Deferred revenue		397,076			310,179
Long term liabilities held for sale		—			29,611
TOTAL LONG-TERM LIABILITIES		466,689			623,947
COMMITMENTS AND CONTINGENCIES (Footnote 9)
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share; ‎3,000,000 shares authorized; NaN issued
Common stock, par value $0.05 per share; 30,000,000 shares authorized;
9,720,627 and 9,321,927 shares issued and outstanding, respectively		486,031			466,096
Additional paid-in capital		44,878,533			43,572,114
Retained earnings (accumulated deficit)		(26,815,002)			4,135,284
Accumulated other comprehensive income (loss)		15,393			(678,767)
TOTAL STOCKHOLDERS' EQUITY		18,564,955			47,494,727
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	56,962,123		$	55,556,325

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



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Sales	$	1,828,299	$	3,354,306	$	5,313,047	$	5,321,683
Cost of sales		1,112,528		2,181,589		3,459,331		3,756,475
Gross profit		715,771		1,172,717		1,853,716		1,565,208
Operating expenses:
Selling, general and administrative expenses		1,687,930		1,959,583		5,566,808		5,016,736
Amortization expense		110,489		106,333		346,277		106,333
Transaction costs		542,509		71,301		1,854,382		485,886
Restructuring expense		242,275		—		242,275		—
Total operating expenses		2,583,203		2,137,217		8,009,742		5,608,955
Operating loss from continuing operations		(1,867,432)		(964,500)		(6,156,026)		(4,043,747)
Other income (expenses):
Investment and other income (expense)		67,791		281,794		(178,874)		665,158
Gain on sale of assets		4,078		—		20,326		308,403
Interest and other expense		(2,352)		(7,060)		(7,290)		(26,151)
Other income (expense), net		69,517		274,734		(165,838)		947,410
Operating loss from continuing operations before income taxes		(1,797,915)		(689,766)		(6,321,864)		(3,096,337)
Income tax expense		5,170		8,952		5,760		4,049
Net loss from continuing operations		(1,803,085)		(698,718)		(6,327,624)		(3,100,386)
Net income from discontinued operations, net of tax		10,411,404		961,083		10,835,605		2,931,863
Net income (loss)		8,608,319		262,365		4,507,981		(168,523)

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities		1,231		(15,897)		(5,416)		(5,800)
Foreign currency translation adjustment		644,590		81,146		699,576		(59,859)
Total other comprehensive income (loss)		645,821		65,249		694,160		(65,659)
Comprehensive income (loss)	$	9,254,140	$	327,614	$	5,202,141	$	(234,182)


Basic net income (loss) per share:
Continuing operations	$	(0.19)	$	(0.07)	$	(0.67)	$	(0.33)
Discontinued operations		1.08		0.10		1.15		0.31
	$	0.89	$	0.03	$	0.48	$	(0.02)

Diluted net income (loss) per share:
Continuing operations	$	(0.18)	$	(0.07)	$	(0.65)	$	(0.33)
Discontinued operations		1.07		0.10		1.12		0.31
	$	0.89	$	0.03	$	0.47	$	(0.02)

Weighted Average Basic Shares Outstanding		9,631,064		9,355,425		9,476,264		9,323,902
Weighted Average Dilutive Shares Outstanding		9,715,252		9,444,986		9,660,317		9,323,902
Dividends declared per share	$	3.50	$	—	$	3.50	$	0.04

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


COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 2021

						Retained		Accumulated
				Additional		Earnings		Other
	Common Stock			Paid-in		(Accumulated		Comprehensive
	Shares	Amount		Capital		Deficit)		(Loss) Income		Total
BALANCE AT DECEMBER 31, 2020	9,321,927	$	466,096	$	43,572,114	$	4,135,284	$	(678,767)	$	47,494,727
Net income	—		—		—		4,507,981		—		4,507,981
Issuance of common stock under
Employee Stock Purchase Plan	9,540		477		48,532		—		—		49,009
Issuance of common stock to
Employee Stock Ownership Plan	72,203		3,610		326,358		—		—		329,968
Issuance of common stock under
Executive Stock Plan	993,977		49,699		3,714,658		—		—		3,764,357
Share based compensation	—		—		559,397		—		—		559,397
Other share retirements	(677,020)		(33,851)		(3,342,526)		(1,436,068)		—		(4,812,445)
Shareholder dividends ($3.50 per share)	—		—		—		(34,022,199)		—		(34,022,199)
Other comprehensive income	—		—		—		—		694,160		694,160
BALANCE AT SEPTEMBER 30, 2021	9,720,627	$	486,031	$	44,878,533	$	(26,815,002)	$	15,393	$	18,564,955


For the Three Months Ended September 30, 2021
								Accumulated
				Additional				Other
	Common Stock			Paid-in		Accumulated		Comprehensive
	Shares	Amount		Capital		Deficit		(Loss) Income		Total
BALANCE AT JUNE 30, 2021	9,470,424	$	473,521	$	44,053,498	$	(7,772)	$	(630,428)	$	43,888,819
Net income	—		—		—		8,608,319		—		8,608,319
Issuance of common stock under
Executive Stock Plan	898,096		44,905		3,714,658		—		—		3,759,563
Share based compensation	—		—		317,065		—		—		317,065
Other share retirements	(647,893)		(32,395)		(3,206,688)		(1,393,355)		—		(4,632,438)
Shareholder dividends ($3.50 per share)	—		—		—		(34,022,194)		—		(34,022,194)
Other comprehensive income	—		—		—		—		645,821		645,821
BALANCE AT SEPTEMBER 30, 2021	9,720,627	$	486,031	$	44,878,533	$	(26,815,002)	$	15,393	$	18,564,955
The accompanying notes are an integral part of the condensed consolidated financial statements.


For the Nine Months Ended September 30, 2020
								Accumulated
				Additional				Other
	Common Stock			Paid-in		Retained		Comprehensive
	Shares	Amount		Capital		Earnings		Loss		Total
BALANCE AT DECEMBER 31, 2019	9,252,749	$	462,637	$	42,977,914	$	4,649,395	$	(697,664)	$	47,392,282
Net loss	—		—		—		(168,523)		—		(168,523)
Issuance of common stock under
Employee Stock Purchase Plan	12,968		648		66,246		—		—		66,894
Issuance of common stock to
Employee Stock Ownership Plan	66,059		3,303		404,281		—		—		407,584
Issuance of common stock under
Executive Stock Plan	64,352		3,218		20,720		—		—		23,938
Share based compensation	—		—		319,777		—		—		319,777
Other share retirements	(82,964)		(4,148)		(387,265)		37,192		—		(354,221)
Shareholder dividends ($0.04 per share)	—		—		—		(380,041)		—		(380,041)
Other comprehensive loss	—		—		—		—		(65,659)		(65,659)
BALANCE AT SEPTEMBER 30, 2020	9,313,164	$	465,658	$	43,401,673	$	4,138,023	$	(763,323)	$	47,242,031


For the Three Months Ended September 30, 2020
								Accumulated
				Additional				Other
	Common Stock			Paid-in		Retained		Comprehensive
	Shares	Amount		Capital		Earnings		Loss		Total
BALANCE AT JUNE 30, 2020	9,351,486	$	467,573	$	43,495,046	$	3,830,132	$	(828,572)	$	46,964,179
Net income	—		—		—		262,365		—		262,365
Issuance of common stock under
Employee Stock Purchase Plan	4,899		245		24,593		—		—		24,838
Issuance of common stock under
Executive Stock Plan	15,768		789		15,540		—		—		16,329
Share based compensation	—		—		143,150		—		—		143,150
Other share retirements	(58,989)		(2,949)		(276,656)		44,309		—		(235,296)
Shareholder dividends ($0.00 per share)	—		—		—		1,217		—		1,217
Other comprehensive income	—		—		—		—		65,249		65,249
BALANCE AT SEPTEMBER 30, 2020	9,313,164	$	465,658	$	43,401,673	$	4,138,023	$	(763,323)	$	47,242,031
The accompanying notes are an integral part of the condensed consolidated financial statements.

‎


COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	4,507,981	$	(168,523)
Net income from discontinued operations, net of tax		10,835,605		2,931,863
Net loss from continuing operations		(6,327,624)		(3,100,386)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization		643,541		621,363
Share based compensation		559,397		319,777
Deferred taxes		—		9,534
Investment impairment loss		399,829		—
Gain on sale of assets		(20,326)		(303,899)
Changes in assets and liabilities:
Trade accounts receivable		2,238,172		(3,852,877)
Inventories		15,167		(136,732)
Prepaid income taxes		20,039		(15,587)
Other assets, net		(507,020)		(319,063)
Accounts payable		1,007,228		1,125,157
Accrued compensation and benefits		(70,858)		(73,895)
Other accrued liabilities		123,729		114,762
Net cash used in operating activities - continuing operations		(1,918,726)		(5,611,846)
Net cash (used in) provided by operating activities - discontinued operations		(707,243)		32,012
Net cash used in operating activities		(2,625,969)		(5,579,834)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(20,264)		(101,032)
Acquisition of business, net of cash acquired		—		(3,975,894)
Purchases of investments		—		(18,415,534)
Proceeds from the sale of property, plant and equipment		20,326		420,000
Proceeds from the sale of investments		2,703,601		15,277,710
Net cash provided by (used in) investing activities - continuing operations		2,703,663		(6,794,750)
Net cash provided by investing activities - discontinued operations		23,625,453		7,977,300
Net cash provided by investing activities		26,329,116		1,182,550
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid		(16,152)		(563,766)
Proceeds from issuance of common stock, net of shares withheld		3,813,366		90,832
Payment of contingent consideration related to acquisition		(550,000)		—
Purchase of common stock		(4,812,445)		(354,221)
Net cash used in financing activities		(1,565,231)		(827,155)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH		54,386		(7,725)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		22,192,302		(5,232,164)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		13,092,484		14,607,510
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	35,284,786	$	9,375,346
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes (refunded) paid	$	(17,971)	$	10,102
Interest paid		4,639		25,387
Dividends declared not paid		34,022,195		16,637
Operating right of use assets obtained in exchange for lease obligations		—		208,650

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

COMMUNICATIONS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~(Unaudited)~~

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Communications Systems, Inc. (herein collectively referred to as “CSI,” “our,” “we” or the “Company”) is a Minnesota corporation organized in 1969 that operates directly and through its subsidiaries located in the United States (U.S.) and the United Kingdom (U.K.). CSI is principally engaged in operations through its subsidiaries Transition Networks, Inc. (“Transition Networks” or “Transition”), U.K.-based Net2Edge Limited (“Net2Edge”), JDL Technologies, Incorporated (“JDL Technologies” or “JDL”), and Ecessa Corporation (“Ecessa”). During the second quarter of 2020, following the May 2020 acquisition of Ecessa and the consolidation of operations within the Transition Networks and Net2Edge divisions, the Company realigned its business operations. Following this realignment, the Company now classifiesuntil August 2, 2021 classified its business into ~~two~~2 segments: (1) the Electronics & Software segment (consisting of US-based subsidiary Transition Networks and UK-based subsidiary Net2Edge) which (i) manufactures and sells solutions that provide actionable intelligence, power and connectivity at the edge of networks through ~~Power over Ethernet (“PoE”)~~PoE products, software and services as well as traditional products such as media converters, network adapters and other connectivity products and (ii) designs, develops, and sells edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications market; and (2) the Services and Support segment (consisting of subsidiaries JDL and Ecessa), which (i) provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment and (ii) designs, develops, and sells SD-WAN (software-designed wide-area network) solutions.

As previously disclosed, on August 2, 2021, the Company and Lantronix, Inc. completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to the securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”). As a result, sales and expenses related to the operations of the former Electronics & Software segment have been presented as discontinued operations in this Form 10-Q.

For purposes of this Form 10-Q, the Company classifies operations from its Services & Support segment. Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting. ~~Intersegment~~Intercompany revenues are eliminated upon consolidation.

Financial Statement Presentation

The condensed consolidated balance ~~sheets and condensed consolidated statement of changes in stockholders’ equity~~sheet as of September 30, ~~2020 and~~2021, the related condensed consolidated statements of income (loss) and comprehensive income (loss), the condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the periods ended September 30, ~~2020~~2021 and ~~2019~~2020 have been prepared by Company management. In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at September 30, ~~2020~~2021 and ~~2019~~2020 and for the periods then ended have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. We recommend these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, ~~2019~~2020 Annual Report to Shareholders on Form 10-K (“~~2019~~2020 Form 10-K”). The results of operations for the period ended September 30, ~~2020~~2021 are not necessarily indicative of operating results for the entire year.

The presentation of financial statements in conformity with generally accepted accounting principles 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 balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates.

Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the ~~2019~~December 31, 2020 Form 10-K, appropriately represent, in all material respects, the current status of accounting policies, and are incorporated herein by reference.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follows:

Foreign Currency
Translation Unrealized gain
(loss) on
securities Accumulated
Other
Comprehensive
Loss
December 31, 2019 $ (709,000 ) $ 11,000 $ (698,000 )

Net current period change (60,000 ) (5,000 ) (65,000 )

September 30, 2020 $ (769,000 ) $ 6,000 $ (763,000 )



					Accumulated Other Comprehensive Loss
					Other
	Foreign Currency		Unrealized gain		Comprehensive
	Translation		(loss) on securities		Loss
December 31, 2020	$	(700,000)	$	21,000	$	(679,000)

Net current period change		700,000		(6,000)		694,000

September 30, 2021	$	—	$	15,000	$	15,000

NOTE 2 – REVENUE RECOGNITION

~~Electronics & Software~~

The Company has determined that the revenue recognition for its Electronics & Software segment occurs upon delivery of the Company’s connectivity infrastructure and data transmission products. To determine when revenue should be recognized, it is important to determine when the transfer of control has occurred. The Company has determined that control transfers for these products upon shipment or delivery to the customer, in accordance with the agreed upon shipping terms. As such, the timing of revenue recognition occurs at a specific point in time.

Services & Support

The Company has determined that the following performance obligations identified in its Services & Support segment are transferred over time: managed services and professional services (time and materials (“T&M”) and fixed price) as well as services under maintenance and service contracts. The managed services performance obligation is a bundled solution consisting of a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are therefore recognized evenly over the term of the contract. T&M professional services arrangements are recognized over time with an input method based on hours expended towards satisfying the performance obligation. Fixed price professional service arrangements under a relatively longer-term service are also recognized over time with an input method based on hours expended. Maintenance and service contracts are recognized evenly over the life of the contract.

The Company has also identified the following performance obligations within its Services & Support segment that are recognized at a point in ~~time which include~~time: resale of third-party hardware and ~~software, installation,~~software; installation; arranging for another party to transfer services to the ~~customer,~~customer; and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time after the Company has transferred control when the service is first available to the customer by the third-party vendor. The Company reports revenue from these third-party services on a net basis in its financial statements. Depending on the nature of the service, certain

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

Disaggregation of revenue

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues, which is different for each segment. During the second quarter of 2020, following the May 2020 acquisition of Ecessa and the consolidation of operations within the Transition Networks and Net2Edge divisions, the Company realigned its business operations. Following this realignment, the Company now classifies its businesses into two segments, Electronics & Software and Services & Support. To conform to the presentation, the Company has reclassified the 2019 information within its financial statements in this Form 10-Q.revenues.

~~For the Electronics & Software segment, we analyze revenue by region and product group, which is as follows for the three and nine months ended September 30, 2020 and 2019:~~

Electronics & Software Sales by Region
Three Months Ended September 30 Nine Months Ended September 30
2020 2019 2020 2019
North America $ 7,672,000 $ 11,479,000 $ 22,019,000 $ 26,448,000
International 1,083,000 1,556,000 3,560,000 5,814,000
$ 8,755,000 $ 13,035,000 $ 25,579,000 $ 32,262,000

Electronics & Software Sales by Product Group
Three Months Ended September 30 Nine Months Ended September 30
2020 2019 2020 2019
Intelligent edge solutions $ 2,990,000 $ 5,791,000 $ 9,368,000 $ 10,846,000
Traditional products 5,765,000 7,244,000 16,211,000 21,416,000
$ 8,755,000 $ 13,035,000 $ 25,579,000 $ 32,262,000

For the Services & Support segment, we analyze revenue by customer group and type, which is as follows for the three and nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:

Services & Support Revenue by Customer Group
Three Months Ended September 30 Nine Months Ended September 30
2020 2019 2020 2019
Education $ 2,312,000 $ 63,000 $ 3,031,000 $ 1,831,000
Healthcare 244,000 175,000 674,000 551,000
Financial and other commercial clients 799,000 353,000 1,616,000 902,000
CSI IT operations 175,000 192,000 561,000 658,000
$ 3,530,000 $ 783,000 $ 5,882,000 $ 3,942,000

Services & Support Revenue by Type
Three Months Ended September 30 Nine Months Ended September 30
2020 2019 2020 2019
Project & product revenue $ 2,611,000 $ 130,000 $ 3,498,000 $ 2,124,000
Services & support revenue 919,000 653,000 2,384,000 1,818,000
$ 3,530,000 $ 783,000 $ 5,882,000 $ 3,942,000


	Services & Support Revenue by Customer Group
	Three Months Ended September 30				Nine Months Ended September 30
		2021		2020		2021		2020
Financial	$	482,000	$	117,000	$	1,306,000	$	314,000
Healthcare		261,000		244,000		760,000		674,000
Education		64,000		2,312,000		212,000		3,031,000
Other commercial clients		1,021,000		682,000		3,035,000		1,302,000
CSI IT operations		119,000		175,000		406,000		561,000
	$	1,947,000	$	3,530,000	$	5,719,000	$	5,882,000


	Services & Support Revenue by Type
	Three Months Ended September 30				Nine Months Ended September 30
		2021		2020		2021		2020
Project & product revenue	$	297,000	$	2,611,000	$	927,000	$	3,498,000
Services & support revenue		1,650,000		919,000		4,792,000		2,384,000
	$	1,947,000	$	3,530,000	$	5,719,000	$	5,882,000

NOTE 3 – DISCONTINUED OPERATIONS

On March 11, 2020, the Company sold the remainder of its Suttle business lines, including the SoHo, MediaMAX, and SpeedStar brands and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle Infrastructure, Inc. (“Oldcastle”) for $8,000,000, with a working capital adjustment 90 days after close. Oldcastle will operate the majority of the acquired Suttle business through its wholly-owned subsidiary, Primex Technologies, Inc. The Company received proceeds of ~~$8,243,000~~$8,900,000 and recorded a gain on the sale of ~~$2,057,000 in the first nine months of~~$2,247,000 during 2020.

Concurrent with the closing of the transaction, the Company and Oldcastle entered into a Transition Services Agreement (“TSA”) under which Suttle ~~agreed to continue~~continued to manufacture products for Oldcastle for ~~up to~~ six months, to ensure seamless supply and quality assurance to the existing customer base. ~~As of September 30, 2020, the services under the TSA were complete and the plant closed and was readied for sale.~~ Concurrently with the closing of the transaction and the TSA, the Company and Oldcastle also entered into a lease agreement under which Oldcastle agreed to lease ~~two~~2 buildings in Hector, Minnesota, where Suttle had conducted operations. Base rents under the lease agreement range from $6,970 to $7,180 per month. On October 29, 2020, the Company conducted an on-line auction for the remaining Suttle machinery and equipment assets in Hector and the preliminary net sales price totaled $700,000. The associated assets and liabilities related to this sale were classified as held for sale at December 31, 2019. The presentation of discontinued operations with respect to this Suttle sale has been retrospectively applied to all prior periods presented.

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

The Company received net proceeds of $23,630,000, which included a working capital adjustment of $(1,376,000) and recorded a gain on sale of $13,455,000 during the third quarter of 2021. The presentation of discontinued operations with respect to this E&S Sale Transaction has been retrospectively applied to all prior periods presented.

Under the securities purchase agreement, Lantronix has also agreed to pay CSI, if earned, earnout payments of up to $7.0 million payable following 2 successive 180-day intervals after the closing of the E&S Sale Transaction based on revenue targets for the business of the TN Companies as specified in the securities purchase agreement, subject to certain adjustments and allocations as further described in the securities purchase agreement. Concurrently with the closing of the transaction, CSI and Lantronix entered into a transition services agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix at CSI’s Minnetonka, Minnesota facility for a period of up to twelve months.

On August 31, 2021, the Company entered into a purchase agreement with Winport Holdings, LLC for the sale of the Company’s real and personal property located in Hector, Minnesota including the lease with Oldcastle for $900,000. The Company recorded a $100,000 impairment loss on these assets in order to write down the assets to the fair value less the costs to sell and recorded the assets as held for sale at September 30, 2021.

The assets ~~and liabilities~~ of the discontinued operations classified as held for sale are as follows:

September 30, 2020 December 31, 2019

  Trade accounts receivable $ — $ 2,235,000
  Inventories — 3,009,000
  Other current assets — 93,000
Total current assets $ — $ 5,337,000

Property, plant, and equipment $ 446,000 $ 883,000
Total noncurrent assets $ 446,000 $ 883,000

Total assets held for sale $ 446,000 $ 6,220,000

Accounts payable $ — $ 1,111,000
Other accrued liabilities — 82,000
Total liabilities held for sale $ — $ 1,193,000


		September 30, 2021		December 31, 2020
Cash and cash equivalents	$	—	$	303,000
Trade accounts receivable		—		5,775,000
Inventories		—		8,561,000
Other current assets		—		439,000
Total current assets	$	—	$	15,078,000


Property, plant, and equipment	$	846,000	$	1,154,000
Right of use asset				129,000
Total noncurrent assets	$	846,000	$	1,283,000

Total assets held for sale	$	846,000	$	16,361,000


Accounts payable	$	—	$	1,669,000
Accrued compensation and benefits		—		767,000
Operating lease liability		—		86,000
Other accrued liabilities		—		1,206,000
Total current liabilities	$	—	$	3,728,000

Operating lease liability	$	—	$	30,000
Total noncurrent liabilities	$	—	$	30,000

Total liabilities held for sale	$	—	$	3,758,000

The financial results of the discontinued operations are as follows:

Three Months Ended September 30 Nine Months Ended September 30
2020 2019 2020 2019

Sales $ — $ 4,601,000 $ 3,024,000 $ 14,804,000
Cost of sales 99,000 3,148,000 2,149,000 10,083,000
Selling, general and administrative expenses 22,000 596,000 522,000 1,997,000
Restructuring expenses 194,000 — 958,000 —
Gain on sale of assets (19,000 ) (4,000 ) (2,058,000 ) (2,989,000 )
Other expense — — — —
Operating (loss) income before income taxes (296,000 ) 861,000 1,453,000 5,713,000
Income tax expense (benefit) (5,000 ) 10,000 — 7,000
(Loss) income from discontinued operations $ (291,000 ) $ 851,000 $ 1,453,000 $ 5,706,000


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Sales	$	2,806,000	$	9,067,000	$	20,478,000	$	30,354,000
Cost of sales		1,789,000		5,027,000		11,774,000		17,894,000
Selling, general and administrative expenses		1,044,000		2,848,000		7,090,000		10,310,000
Transaction costs		982,000		—		2,141,000		—
Impairment loss		100,000		—		100,000		—
Restructuring expenses		1,287,000		194,000		1,287,000		958,000
Gain on sale of assets		(13,455,000)		(19,000)		(13,455,000)		(2,057,000)
Foreign currency translation loss		642,000		—		642,000		—
Other expense		4,000		61,000		61,000		317,000
Operating income before income taxes		10,413,000		956,000		10,838,000		2,932,000
Income tax expense		2,000		(5,000)		2,000		—
Income from discontinued operations	$	10,411,000	$	961,000	$	10,836,000	$	2,932,000

During the three and nine months ended September 30, ~~2020,~~2021, the Company recorded ~~$958,000~~$1,529,000 in restructuring ~~expense.~~expense, with $1,287,000 in discontinued operations. This consisted of severance and related benefits costs due to the sale of the ~~remainder~~E&S segment. The Company incurred $958,000 in restructuring costs during the nine months ended September 30, 2020 related to severance and related benefits due to the sale of Suttle’s business ~~lines and the closure of the plant now that the TSA is completed. We expect total restructuring costs over 2020 and 2021 to be $1,100,000, including any remaining shut down costs.~~lines. The Company paid ~~$396,000~~$1,169,000 in restructuring charges during the first nine months of ~~2020~~2021 and had ~~$562,000~~$612,000 in restructuring accruals recorded in accrued compensation and benefits at September 30, ~~2020~~2021 that are expected to be paid during ~~2020~~2021 and ~~2021.~~ 2022.

NOTE 4 – CASH EQUIVALENTS AND INVESTMENTS

The following tables show the Company’s cash equivalents and ~~available –for-sale~~available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- and long-term investments as of September 30, ~~2020~~2021 and December 31, ~~2019:~~

September 30, 2020

Amortized
Cost
Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Cash
Equivalents Short-Term
Investments Long-Term
Investments

Cash equivalents:
Money Market funds $ 7,189,000 $ — $ — $ 7,189,000 $ 7,189,000 $ — $ —
Subtotal 7,189,000 — — 7,189,000 7,189,000 — —

Investments:
Commercial Paper 3,898,000 2,000 — 3,900,000 — 3,900,000 —
Corporate Notes/Bonds 7,687,000 — (9,000 ) 7,678,000 — 1,365,000 6,313,000
Convertible Debt 355,000 — — 355,000 — — 355,000
Subtotal 11,940,000 2,000 (9,000 ) 11,933,000 — 5,265,000 6,668,000

Total $ 19,129,000 $ 2,000 $ (9,000 ) $ 19,122,000 $ 7,189,000 $ 5,265,000 $ 6,668,000

December 31, 2019

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Cash
Equivalents Short-Term
Investments Long-Term
Investments

Cash equivalents:
Money Market funds $ 8,761,000 $ — $ — $ 8,761,000 $ 8,761,000 $ — $ —
Subtotal 8,761,000 — — 8,761,000 8,761,000 — —

Investments:
Commercial Paper 8,695,000 — (1,000 ) 8,694,000 — 8,694,000 —
Corporate Notes/Bonds 756,000 — — 756,000 — 756,000 —
Convertible Debt 250,000 — — 250,000 — — 250,000
Subtotal 9,701,000 — (1,000 ) 9,700,000 — 9,450,000 250,000

Total $ 18,462,000 $ — $ (1,000 ) $ 18,461,000 $ 8,761,000 $ 9,450,000 $ 250,000

2020:



September 30, 2021
	Amortized Cost		Gross Unrealized ‎Gains		Gross Unrealized ‎Losses		Fair Value		Cash Equivalents		Short-Term ‎Investments		Long-Term ‎Investments
Cash equivalents:
Money Market funds	$	33,138,000	$	—	$	—	$	33,138,000	$	33,138,000	$	—	$	—
Subtotal		33,138,000		—		—		33,138,000		33,138,000		—		—

Investments:
Corporate Notes/Bonds		5,653,000		3,000		(1,000)		5,655,000		—		2,861,000		2,794,000
Convertible Debt		250,000		—		—		250,000		—		—		250,000
Subtotal		5,903,000		3,000		(1,000)		5,905,000		—		2,861,000		3,044,000


Total	$	39,041,000	$	3,000	$	(1,000)	$	39,043,000	$	33,138,000	$	2,861,000	$	3,044,000



December 31, 2020
	Amortized Cost		Gross Unrealized ‎Gains		Gross Unrealized ‎Losses		Fair Value		Cash Equivalents		Short-Term ‎Investments		Long-Term ‎Investments
Cash equivalents:
Money Market funds	$	9,424,000	$	—	$	—	$	9,424,000	$	9,424,000	$	—	$	—
Subtotal		9,424,000		—		—		9,424,000		9,424,000		—		—

Investments:
Commercial Paper		700,000		—		—		700,000		—		700,000		—
Corporate Notes/Bonds		7,658,000		7,000		(1,000)		7,664,000		—		2,059,000		5,605,000
Convertible Debt		605,000		—		—		605,000		—		—		605,000
Subtotal		8,963,000		7,000		(1,000)		8,969,000		—		2,759,000		6,210,000


Total	$	18,387,000	$	7,000	$	(1,000)	$	18,393,000	$	9,424,000	$	2,759,000	$	6,210,000

The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of September 30, ~~2020:~~

Amortized Cost Estimated Market Value

Due within one year $ 5,264,000 $ 5,265,000
Due after one year through five years 6,676,000 6,668,000
$ 11,940,000 $ 11,933,000

2021:
‎



	Amortized Cost		Estimated Market ‎Value
Due within one year	$	2,860,000	$	2,861,000
Due after one year through five years		3,043,000		3,044,000
	$	5,903,000	$	5,905,000

~~The Company did not recognize any gross realized gains or losses during either~~

During the first nine months of ~~the three or nine month periods ending September 30, 2020 and 2019, respectively. If~~2021, the Company ~~had~~recognized a realized ~~gains or losses, they would be included~~loss on its convertible debt investments and recorded $400,000 in expense within investment and other income (expense) in the accompanying condensed consolidated statement of income (loss) and comprehensive income (loss).
The Company did 0t recognize any gross realized gains during either of the three or nine-month periods ending September 30, 2021.

In April 2020, the Company made an $899,000 investment in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE solutions for critical and secure communications. This investment iswas important for the Company’s Electronics & Software segment because this segment ~~has been~~was partnering with Quortus to integrate the Quortus Private LTE core in existing and new products for that segment’s federal business, network extensions, and private networks for enterprises. The Company’s investment represents less than 10% of the outstanding equity of Quortus Ltd. The Company uses the cost method to account for investments in common stock of entities such as Quortus if the Company does not have the ability to exercise significant influence over the operating and financial matters of the entity. The Company also uses the cost method to account for its investments that are not in the form of common stock or in-substance common stock in entities if the Company does not have the ability to exercise significant influence over the entity’s operating and financial matters.

NOTE 5 - STOCK-BASED COMPENSATION

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85% of the price at the end of each current quarterly plan term. The ~~most recent term ended September 30, 2020. The~~ ESPP is considered compensatory under current Internal Revenue Service rules. At September 30, ~~2020, after giving effect to the shares issued as of that date, 76,154~~2021, 59,303 shares remain available for future issuance under the ESPP. The ESPP was suspended effective March 31, 2021 due to conditions of the Pineapple Merger Agreement.

2011 Executive Incentive Compensation Plan

On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 ~~Incentive~~ Plan”). The 2011 ~~Incentive~~ Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash. The 2011 ~~Incentive~~ Plan, as amended, allows the issuance of up to 2,500,000 shares of common stock.

At September 30, ~~2020, 429,432~~2021, 1,425,008 shares have been issued under the 2011 ~~Incentive~~ Plan, ~~1,509,623~~there are 0 shares ~~are~~ subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and ~~560,945~~1,074,992 shares are eligible for grant under future awards.

The closing of the E&S Sale Transaction on August 2, 2021 constituted a “Change in Control” as defined in the Company’s 2011 Plan. In accordance with the determinations and approvals of the Compensation Committee, effective on August 1, 2021, each Incentive Award granted and outstanding under the 2011 Plan and not otherwise forfeited or expired in accordance with its terms was fully vested and exercisable and any restrictions lapsed. After giving effect to such acceleration and vesting, on the August 2, 2021 closing date:

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

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

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

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

Due to conditions of the Pineapple Merger Agreement, no additional awards have been made under the 2011 Plan.

Changes in Stock Options Outstanding

The following table summarizes changes in the number of outstanding stock options under the 2011 ~~Incentive~~ Plan over the period December 31, ~~2019~~2020 to September 30, ~~2020:~~2021:

Options Weighted average
exercise price
per share Weighted average
remaining
contractual term
in years
Outstanding – December 31, 2019 1,130,472 $ 7.28 3.48
Awarded 159,301 5.22
Exercised (8,000 ) 2.64
Forfeited (46,369 ) 11.11
Outstanding – September 30, 2020 1,235,404 6.90 3.33

Exercisable at September 30, 2020 961,317 $ 7.58 2.65
Expected to vest September 30, 2020 1,235,404 6.90 3.33

~~The~~



				Weighted average
		Weighted average		remaining
		exercise price		contractual term
	Options	per share		in years
Outstanding – December 31, 2020	1,173,190	$	6.52	3.35
Awarded	—		—
Exercised	(799,390)		4.70
Forfeited	(373,800)		10.43
Outstanding – September 30, 2021	0		—	—

Exercisable at September 30, 2021	—	$	—	—
Expected to vest September 30, 2021	—		—	—

Because all outstanding options were either vested and exercised or cancelled, the aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at September 30, ~~2020~~2021 was ~~$193,000.~~$0. The intrinsic value of all options exercised during the nine months ended September 30, ~~2020~~2021 was ~~$18,000.~~$1,961,000. Net cash proceeds from the exercise of all stock options were $15,000 and $0 in each of the nine-month periods ended September 30, ~~2020~~2021 and ~~2019.~~2020.

Changes in Deferred Stock Outstanding

The following table summarizes the changes in the number of deferred stock shares under the 2011 ~~Incentive~~ Plan over the period December 31, ~~2019~~2020 to September 30, ~~2020:~~2021:

Shares Weighted Average
Grant Date
Fair Value
Outstanding – December 31, 2019 321,227 $ 3.37
Granted 89,131 5.39
Vested (56,352 ) 2.64
Forfeited (79,787 ) 4.24
Outstanding – September 30, 2020 274,219 3.92



		Weighted Average
		Grant Date
	Shares	Fair Value
Outstanding – December 31, 2020	272,695	$	3.91
Granted	—		—
Vested	(194,586)		4.05
Forfeited	(78,109)		3.56
Outstanding – September 30, 2021	—		—

Compensation Expense

Share-based compensation expense recognized for the ~~nine-months~~nine months ended September 30, 2021 was $559,000 before income taxes and $442,000 after income taxes. Share-based compensation expense recognized for the nine months ended September 30, 2020 was $320,000 before income taxes and $253,000 after income taxes. ~~Share-based compensation expense recognized for the nine-months ended September 30, 2019~~There was ~~$276,000 before income taxes and $218,000 after income taxes. Unrecognized~~0 unrecognized compensation expense for the Company’s plans ~~was $662,000~~ at September 30, ~~2020 and is expected~~2021 due to ~~be recognized over a weighted-average period~~the acceleration of ~~2.6 years.~~all outstanding equity awards as part of the E&S Sale Transaction. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.

Employee Stock Ownership Plan (ESOP)

All eligible employees of the Company participate in the ESOP after completing one year of service. Contributions are allocated to each participant based on compensation and vest 20% after two years of service and incrementally thereafter, with full vesting after six years. The Company contributed $329,968 for which the Company issued 72,203 shares in March 2021 for the 2020 ESOP contribution. Due to conditions of the Pineapple Merger Agreement, no additional contributions will be made to the ESOP.

NOTE 6 - INVENTORIES

Inventories summarized below are priced at the lower of first-in, first-out cost or net realizable value:

September 30 December 31
2020 2019
Finished goods $ 8,958,000 $ 6,728,000
Raw and processed materials 874,000 1,803,000
$ 9,832,000 $ 8,531,000


	September 30		December 31
	2021		2020
Finished goods	$	35,000	$	22,000
Raw and processed materials		86,000		114,000
	$	121,000	$	136,000

NOTE 7 – ~~ACQUISITION~~BUSINESS COMBINATIONS

On May 14, 2020, in a reverse triangular merger, the Company completed the acquisition of 100% of Ecessa ~~Corporation (“Ecessa”)~~Corporation. Ecessa designs and distributes software-defined wide area networking (SD-WAN) solutions for businesses through the deployment of over 10,000 field installations (since 2002) of Ecessa Edge®, ~~based in Plymouth, Minnesota.~~PowerLink®, and WANworX® controllers. The acquisition expands the Company’s IoT intelligent edge products and services and provides opportunities to expand the Company’s services platform. The purchase price was $4,642,000, with cash acquired totaling $666,000. The purchase price includes initial consideration of $4,666,000 and ~~$ (24,000)~~$(24,000) in working capital adjustments.

The ~~estimated~~ assets and liabilities of Ecessa were recorded in the consolidated balance sheet within the Services & Support segment as of the acquisition date, at their respective fair values. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been allocated as follows:



	May 14, 2020
Current assets	$	1,101,000
Property, plant, and equipment		127,000
Other long-term assets		421,000
Intangible assets		2,260,000
Goodwill		1,341,000
Total assets		5,250,000

Total liabilities		608,000

Net assets acquired	$	4,642,000

Identifiable intangible assets are definite-lived assets. These assets include trade name/trademark/internet domain assets, non-compete agreements, customer relationships, and internally developed software intangible assets, and have a weighted average amortization period of 7 years, which matches the weighted average useful life of the assets. Goodwill recorded as part of the purchase price allocation is not tax deductible.

On November 3, 2020, the Company acquired the operating assets of privately held IVDesk Minnesota, Inc. (“IVDesk”) from a third-party receiver (“Receiver”). IVDesk provides private cloud services to small- and mid-

size businesses (“SMB”), with a particular focus on the financial services industry. The acquisition expands the Company’s monthly recurring revenue service model, bringing additional resources and experience in cloud-delivered applications. The purchase price was $1,368,000 and includes initial consideration of $950,000, working capital adjustments of $(132,000), and $550,000 in contingent consideration, which the Company agreed to pay in additional consideration upon retaining a certain customer level 120 days after closing. During March 2021, upon meeting the requirements of the earn-out, the Company paid the Receiver the additional consideration. At September 30, 2021, the Company had 0 further liabilities related to the contingent consideration.

The assets and liabilities of IVDesk are recorded in the ~~condensed~~ consolidated balance sheet within the Services & Support segment at September 30, ~~2020.~~2021. The purchase price allocation was based on estimates of the fair value of assets acquired and liabilities assumed, and included total assets of ~~$5,249,000,~~$1,500,000, including ~~estimated~~property, plant, and equipment of $35,000, goodwill of ~~$1,371,000~~$745,000 and ~~estimated intangibles~~intangible assets of ~~$2,230,000,~~$720,000, and total liabilities of ~~$608,000. The fair value of acquired identifiable~~$132,000. Identifiable intangible assets are definite-lived assets. These assets include customer relationships and have a weighted average amortization period of ~~$2,230,000 is provisional depending on~~8 years, which matches the ~~final valuations for those~~weighted average useful life of the assets. ~~All balances recorded are estimated amounts and~~

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

The changes in the ~~Company expects to finalize the purchase price allocation during the fourth quarter~~carrying amount of ~~2020 as the valuation of identifiable assets and liabilities is completed. The pro forma impact of Ecessa was not significant to the Company’s results~~goodwill for the ~~three~~year ended December 31, 2020 and nine months ended September 30, ~~2020. Ecessa’s revenue~~2021 by company are as follows:



	Ecessa		IVDesk		Total
January 1, 2020	$	—	$	—	$	—

Acquisition		1,341,000		745,000		2,086,000

December 31, 2020	$	1,341,000	$	745,000	$	2,086,000

September 30, 2021	$	1,341,000	$	745,000	$	2,086,000

Gross goodwill		1,341,000		745,000		2,086,000
Accumulated impairment loss		—		—		—
Balance at September 30, 2021	$	1,341,000	$	745,000	$	2,086,000

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and ~~operating loss since acquisition are $798,000~~were as follows:



		September 30, 2021
	Gross Carrying Amount		Accumulated Amortization		Net
Trade Name/Trademark/Internet Domain Assets	$	101,000	$	(12,000)	$	89,000
Non-compete Agreements		80,000		(36,000)		44,000
Customer Relationships		1,010,000		(160,000)		850,000
Internally Developed Software		1,800,000		(342,000)		1,458,000
	$	2,991,000	$	(550,000)	$	2,441,000



		December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net
Trade Name/Trademark/Internet Domain Assets	$	90,000	$	(5,000)	$	85,000
Non-compete Agreements		80,000		(16,000)		64,000
Customer Relationships		1,010,000		(34,000)		976,000
Internally Developed Software		1,800,000		(150,000)		1,650,000
	$	2,980,000	$	(205,000)	$	2,775,000

Amortization expense on these identifiable intangible assets was $346,000 and ~~$ (319,000),~~$106,000 in first nine months of 2021 and 2020 respectively. The ~~operating loss~~amortization expense is ~~primarily due to~~included in selling, general and administrative expenses. The estimated future amortization expense for identifiable intangible assets during the ~~revaluation of $1,561,000 of pre-acquisition deferred revenue to a preliminary fair value of $257,000~~next five fiscal years is as of the opening balance sheet date and $106,000 of intangibles amortization, thus lowering revenue recognized and increasing post-acquisition expenses on a similar operating cost structure. The Company is still in process of integrating Ecessa into its operations and therefore has not realized all potential cost-saving synergies. The Company will include further, more detailed information on the 2020 post-acquisition Ecessa operating results in the 2020 Form 10-K.follows:



Year Ending December 31:
Q4 2021	$	111,000
2022		442,000
2023		426,000
2024		415,000
2025		381,000
Thereafter		666,000

NOTE 89 – COMMITMENTS & CONTINGENCIES

In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims. Company management is not aware of any outstanding or pending legal actions or claims that could materially affect the Company’s financial position or results of operations.

~~NOTE 9 – DEBT~~On September 15, 2021, CSI entered into an amended and restated securities purchase agreement with a group of institutional investors (the “PIPE Investors”) to make a $32.0 million private placement investment in CSI in connection with the closing of the previously announced merger transaction between CSI and Pineapple Energy, LLC (“Pineapple”). Proceeds of this investment will used primarily to fund Pineapple strategic initiatives. The closing of the financing is subject to approval of CSI’s shareholders and other customary conditions.

Under the terms of the securities purchase agreement, the PIPE Investors have agreed to purchase $32.0 million in newly authorized CSI Series A Convertible Preferred Stock convertible at a price of $3.40 per share into CSI common stock, with five year warrants to purchase an additional $32.0 million of common shares at that same price (the “PIPE Offering”). The PIPE Offering is expected to close immediately following the consummation of the CSI-Pineapple merger transaction (the “Merger”). Therefore the PIPE Investors will invest in the post-Merger company, will not be entitled to receive any cash dividends paid prior to closing and will not receive the Contingent Value Rights (“CVRs”) to be issued to pre-Merger CSI shareholders.

The Series A Convertible Preferred Stock will have no liquidation or dividend preference over CSI common stock and no voting rights until after converted into CSI common stock. Assuming conversion of the Series A Convertible Preferred Stock, the PIPE Investors would own approximately 9.41 million shares of the Company’s outstanding common stock immediately following the closing of the PIPE Offering, representing approximately 27% of CSI’s outstanding Common Stock after giving effect to the issuance of shares in the

Merger, and approximately 18.8 million shares assuming exercise of all the warrants for cash, representing approximately 43% of CSI’s outstanding common stock after giving effect to the issuance of shares in the Merger and exercise of the warrants.

The Series A Convertible Preferred Stock and warrants will have anti-dilution provisions that would increase the number of shares issuable upon conversion or exercise, and lower the conversion or exercise price, if CSI issues equity securities at a price less than the conversion or exercise price at the time of such issuance. The securities purchase agreement also prohibits the combined company from conducting a new equity offering within 30 days of the closing, gives the PIPE Investors in the aggregate the right to purchase up to 25% of the equity securities in future CSI-Pineapple offerings within one year of closing and requires 30-day lock-up agreements of CSI common stock by certain CSI-Pineapple officers, directors and major shareholders following the closing. In connection with the transaction, CSI has agreed to file a registration statement on behalf of the PIPE Investors allowing them to resell the common stock into which the Series A Convertible Preferred Stock is convertible and the warrants are exercisable immediately after issuance. Closing is subject to the effectiveness of this registration statement and other customary closing conditions.

Line of Credit

On August 28, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, establishing a $5,000,000 line of credit facility agreement that replaced a prior facility. On October 29, 2020, the Company entered into a First Amendment to the Credit Agreement. Under the Credit Agreement, as amended, the Company has the ability to obtain ~~one~~1 or more letters of credit in an aggregate amount up to $2,000,000, subject to the general terms of the credit agreement.

The Company ~~had no outstanding borrowings against~~did not plan to renew the line of credit, or the prior credit facility, at September 30, 2020 or December 31, 2019 and $3,976,000 of the credit line is available for use. Due to the revolving nature of loans under this credit facility, additional borrowings and periodic repayments and re-borrowings may be made until the maturity date. Interest on borrowings on the credit line is at LIBOR plus 1.25% , with a minimum LIBOR rate of 0.75%, (2.0% at September 30, 2020). The Credit Agreement ~~expires August 28, 2021~~upon its expiration and ~~is secured by assets of~~terminated the ~~Company. The~~ Credit Agreement ~~contains financial covenants including a tangible net worth minimum. The Company was in compliance with its financial covenants at September 30, 2020.~~effective August 13, 2021.

NOTE 10 – INCOME TAXES

In the preparation of the Company’s consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Management analyzes these assets and liabilities regularly and assesses the likelihood that deferred tax assets will be recovered from future taxable income.

At September 30, ~~2020~~2021 there was ~~$111,000~~$117,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized. The Company records interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of income (loss) and comprehensive income (loss).

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years ~~2017-2019~~2018-2020 remain open to examination by the Internal Revenue Service and the years ~~2016-2019~~2017-2020 remain open to examination by various state tax departments. The tax ~~years from 2016-2018 remain~~year of 2018 remains open in Costa Rica.

The Company’s effective income tax rate was ~~(0.3%~~(0.1%) for the first nine months of ~~2020.~~2021. The effective tax rate differs from the federal tax rate of 21% due to state income taxes, ~~foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes,~~ the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. The foreign operating losses may ultimately be deductible in the countries in which they occurred; however, the Company has ~~not~~0t recorded a deferred tax asset for these losses due to uncertainty regarding the eventual realization of the benefit. The effect of the foreign operations was an overall rate decrease of approximately ~~99.3%~~0.0% for the nine months ended September 30, ~~2020~~.2021. There were no0 additional uncertain tax positions identified in the first nine

months of ~~2020.~~2021. The ~~Company’s~~Company's effective income tax rate for the nine months ended September 30, ~~2019~~2020 was 4~~.3%~~(0.1%), and differed from the federal tax rate due to state income taxes, ~~foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes,~~ changes in the reserve for uncertain income tax positions, provisions for interest charges for uncertain income tax positions, stock compensation ~~shortfalls~~windfalls and changes in valuation allowances related to deferred tax assets.

NOTE 11 – SEGMENT INFORMATION

~~Following the acquisition of Ecessa during the second quarter of 2020 and the merging of certain operations, the~~The Company classifies its ~~remaining businesses~~business operations into ~~two segments~~1 segment as follows:

●

Electronics & Software: designs, develops and sells Intelligent Edge solutions that provide connectivity and power through PoE products and actionable intelligence to end devices in an IoT ecosystem through embedded and cloud-based management software. In addition, this segment continues to generate revenue from its traditional products consisting of, media converters, NICs, and Ethernet switches that offer the ability to affordably integrate the benefits of fiber optics into any data network; and

●

Services & Support: provides technology solutions that address prevalent IT challenges, including network resiliency, security products and services, network virtualization, and cloud migrations, IT managed services, wired and wireless network design and implementation, and converged infrastructure configuration, deployment and management.

Services & Support: provides technology solutions that address prevalent IT challenges, including network resiliency, security products and services, network virtualization, and cloud migrations, IT managed services, wired and wireless network design and implementation, and converged infrastructure configuration, deployment and management.

Management has chosen to historically organize the Company and disclose reportable segments based on our products and services. ~~Intersegment~~Intercompany revenues are eliminated upon consolidation. “Other” includes non-allocated corporate overhead costs. As a result of our treatment of Suttle and the E&S Segment as discontinued operations, “Other” includes amounts previously allocated to Suttle and E&S that do not meet the criteria to be included in income from discontinued operations. ~~The Company has reclassified its 2019 financial statements to conform to its new segment reporting.~~

Information concerning the Company’s continuing operations in ~~these two segments~~its S&S segment for the three and ~~nine-month~~nine month periods ended September 30, ~~2020~~2021 and ~~2019~~2020 are as follows:

Electronics &
Software Services &
Support Other Intersegment
Eliminations Total

Three Months Ended September 30, 2020
Sales $ 8,755,000 $ 3,530,000 $ — $ (175,000 ) $ 12,110,000
Cost of sales 4,746,000 2,190,000 — (8,000 ) 6,928,000
Gross profit 4,009,000 1,340,000 — (167,000 ) 5,182,000
Selling, general and administrative expenses 3,281,000 909,000 782,000 (167,000 ) 4,805,000
Acquisition costs — — 71,000 — 71,000
Operating income (loss) 728,000 431,000 (853,000 ) — 306,000
Other (expense) income (18,000 ) — 275,000 — 257,000
Income (loss) before income tax $ 710,000 $ 431,000 $ (578,000 ) $ — $ 563,000

Depreciation and amortization $ 71,000 $ 146,000 $ 94,000 $ — $ 311,000

Capital expenditures $ 14,000 $ — $ 79,000 $ — $ 93,000

Assets $ 16,600,000 $ 9,034,000 $ 30,110,000 $ (27,000 ) $ 55,717,000

Electronics &
Software Services &
Support Other Intersegment
Eliminations Total

Three Months Ended September 30, 2019
Sales $ 13,035,000 $ 783,000 $ — $ (196,000 ) $ 13,622,000
Cost of sales 6,753,000 603,000 — (19,000 ) 7,337,000
Gross profit 6,282,000 180,000 — (177,000 ) 6,285,000
Selling, general and administrative expenses 4,419,000 349,000 922,000 (177,000 ) 5,513,000
Operating income (loss) 1,863,000 (169,000 ) (922,000 ) — 772,000
Other income 11,000 — 77,000 — 88,000
Income (loss) before income tax $ 1,874,000 $ (169,000 ) $ (845,000 ) $ — $ 860,000

Depreciation and amortization $ 86,000 $ 25,000 $ 154,000 $ — $ 265,000

Capital expenditures $ 8,000 $ 4,000 $ 71,000 $ — $ 83,000

Assets $ 21,114,000 $ 1,419,000 $ 35,201,000 $ (27,000 ) $ 57,707,000



	Services &				Intercompany
	Support		Other		Eliminations		Total
Three Months Ended September 30, 2021
Sales	$	1,947,000	$	—	$	(119,000)	$	1,828,000
Cost of sales		1,113,000		—		—		1,113,000
Gross profit		834,000		—		(119,000)		715,000
Selling, general and
administrative expenses		669,000		1,138,000		(119,000)		1,688,000
Amortization expense		110,000		—				110,000
Transaction costs		—		543,000		—		543,000
Restructuring expense		—		242,000		—		242,000
Operating income (loss)		55,000		(1,923,000)		—		(1,868,000)
Other income		4,000		66,000		—		70,000
Income (loss) before income tax	$	59,000	$	(1,857,000)	$	—	$	(1,798,000)

Depreciation and amortization	$	133,000	$	72,000	$	—	$	205,000

Capital expenditures	$	5,000	$	9,000	$	—	$	14,000

Assets	$	6,776,000	$	50,213,000	$	(27,000)	$	56,962,000

Electronics &
Software Services &
Support Other Intersegment
Eliminations Total

Nine Months Ended September 30, 2020
Sales $ 25,579,000 $ 5,882,000 $ — $ (561,000 ) $ 30,900,000
Cost of sales 14,745,000 3,792,000 — (36,000 ) 18,501,000
Gross profit 10,834,000 2,090,000 — (525,000 ) 12,399,000
Selling, general and administrative expenses 10,816,000 1,720,000 2,466,000 (525,000 ) 14,477,000
Acquisition costs — — 486,000 — 486,000
Operating income (loss) 18,000 370,000 (2,952,000 ) — (2,564,000 )
Other (expense) income (1,000 ) — 947,000 — 946,000
Income (loss) before income tax $ 17,000 $ 370,000 $ (2,005,000 ) $ — $ (1,618,000 )

Depreciation and amortization $ 218,000 $ 178,000 $ 345,000 $ — $ 741,000

Capital expenditures $ 82,000 $ 1,000 $ 100,000 $ — $ 183,000

Electronics &
Software Services &
Support Other Intersegment
Eliminations Total

Nine Months Ended September 30, 2019
Sales $ 32,262,000 $ 3,942,000 $ — $ (661,000 ) $ 35,543,000
Cost of sales 17,892,000 2,643,000 — (144,000 ) 20,391,000
Gross profit 14,370,000 1,299,000 — (517,000 ) 15,152,000
Selling, general and administrative expenses 13,116,000 1,056,000 2,676,000 (517,000 ) 16,331,000
Operating income (loss) 1,254,000 243,000 (2,676,000 ) — (1,179,000 )
Other income (expense) 12,000 (10,000 ) 179,000 — 181,000
Income (loss) before income tax $ 1,266,000 $ 233,000 $ (2,497,000 ) $ — $ (998,000 )

Depreciation and amortization $ 274,000 $ 80,000 $ 452,000 $ — $ 806,000

Capital expenditures $ 19,000 $ 39,000 $ 268,000 $ — $ 326,000



	Services &				Intercompany
	Support		Other		Eliminations		Total
Three Months Ended September 30, 2020
Sales	$	3,530,000	$	—	$	(176,000)	$	3,354,000
Cost of sales		2,190,000		—		(9,000)		2,181,000
Gross profit		1,340,000		—		(167,000)		1,173,000
Selling, general and
administrative expenses		803,000		1,324,000		(167,000)		1,960,000
Amortization expense		106,000		—		—		106,000
Transaction costs		—		72,000		—		72,000
Operating income (loss)		431,000		(1,396,000)		—		(965,000)
Other income		—		275,000		—		275,000
Income (loss) before income tax	$	431,000	$	(1,121,000)	$	—	$	(690,000)

Depreciation and amortization	$	146,000	$	128,000	$	—	$	274,000

Capital expenditures	$	—	$	79,000	$	—	$	79,000

Assets	$	8,334,000	$	47,410,000	$	(27,000)	$	55,717,000



	Services &				Intercompany
	Support		Other		Eliminations		Total
Nine Months Ended September 30, 2021
Sales	$	5,719,000	$	—	$	(406,000)	$	5,313,000
Cost of sales		3,459,000		—		—		3,459,000
Gross profit		2,260,000		—		(406,000)		1,854,000
Selling, general and
administrative expenses		2,290,000		3,683,000		(406,000)		5,567,000
Amortization expense		346,000		—		—		346,000
Transaction costs		—		1,855,000		—		1,855,000
Restructuring expense		—		242,000		—		242,000
Operating loss		(376,000)		(5,780,000)		—		(6,156,000)
Other income (expense)		20,000		(186,000)		—		(166,000)
Loss before income tax	$	(356,000)	$	(5,966,000)	$	—	$	(6,322,000)

Depreciation and amortization	$	426,000	$	218,000	$	—	$	644,000

Capital expenditures	$	11,000	$	9,000	$	—	$	20,000



	Services &				Intercompany
	Support		Other		Eliminations		Total
Nine Months Ended September 30, 2020
Sales	$	5,882,000	$	—	$	(561,000)	$	5,321,000
Cost of sales		3,792,000		—		(36,000)		3,756,000
Gross profit		2,090,000		—		(525,000)		1,565,000
Selling, general and
administrative expenses		1,614,000		3,928,000		(525,000)		5,017,000
Amortization expense		106,000		—		—		106,000
Transaction costs		—		486,000		—		486,000
Operating income (loss)		370,000		(4,414,000)		—		(4,044,000)
Other income		—		948,000		—		948,000
Income (loss) before income tax	$	370,000	$	(3,466,000)	$	—	$	(3,096,000)

Depreciation and amortization	$	178,000	$	443,000	$	—	$	621,000

Capital expenditures	$	1,000	$	100,000	$	—	$	101,000

NOTE 12 – NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during each period and year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in a dilutive effect of ~~89,561~~84,188 and 0184,053 shares for the three and nine months ended September 30, ~~2020,~~2021, respectively. The dilutive effect for the three and nine-month periods ended September 30, ~~2019~~2020 was ~~51,042~~89,561 and ~~8,678~~0 shares, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method. ~~Due to~~There were 0 options or deferred stock awards excluded from the ~~net losses in the first nine months ended~~calculation of diluted earnings per share because there were no outstanding options or deferred stock awards as of September 30, ~~2020, there was no dilutive impact from stock options or unvested shares.~~2021. Options totaling 791,415 and 727,915 were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2020, respectively because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 110,308 shares would not have been included for the three and nine months ended September 30, 2020, because of unmet performance conditions. Options totaling 936,817 and 1,150,865 were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2019, respectively because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 200,260 shares would not have been included for the three and nine months ended September 30, 2019, because of unmet performance conditions.

NOTE 13 – FAIR VALUE MEASUREMENTS

The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, are summarized below:

September 30, 2020

Level 1 Level 2 Level 3 Total Fair Value

Cash equivalents:
Money Market Funds $ 7,189,000 $ — $ — $ 7,189,000
Subtotal 7,189,000 — — 7,189,000

Short-term investments:
Commercial Paper — 3,900,000 — 3,900,000
Corporate Notes/Bonds — 1,365,000 — 1,365,000
Subtotal — 5,265,000 — 5,265,000

Long-term investments:
Corporate Notes/Bonds — 6,313,000 — 6,313,000
Convertible debt — — 355,000 355,000
Subtotal — 6,313,000 355,000 6,668,000

Total $ 7,189,000 $ 11,578,000 $ 355,000 $ 19,122,000

December 31, 2019

Level 1 Level 2 Level 3 Total Fair Value

Cash equivalents:
Money Market Funds $ 8,761,000 $ — $ — $ 8,761,000
Subtotal 8,761,000 — — 8,761,000

Short-term investments:
Commercial Paper — 8,694,000 — 8,694,000
Corporate Notes/Bonds — 756,000 — 756,000
Subtotal — 9,450,000 — 9,450,000

Long-term investments:
Convertible debt — — 250,000 250,000
Subtotal — — 250,000 250,000

Total $ 8,761,000 $ 9,450,000 $ 250,000 $ 18,461,000



	September 30, 2021

	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money Market Funds	$	33,138,000	$	—	$	—	$	33,138,000
Subtotal		33,138,000		—		—		33,138,000

Short-term investments:
Corporate Notes/Bonds		—		2,861,000		—		2,861,000
Subtotal		—		2,861,000		—		2,861,000

Long-term investments:
Corporate Notes/Bonds		—		2,794,000		—		2,794,000
Convertible debt		—		—		250,000		250,000
Subtotal		—		2,794,000		250,000		3,044,000

Total	$	33,138,000	$	5,655,000	$	250,000	$	39,043,000



	December 31, 2020

	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money Market Funds	$	9,424,000	$	—	$	—	$	9,424,000
Subtotal		9,424,000		—		—		9,424,000

Short-term investments:
Commercial Paper		—		700,000		—		700,000
Corporate Notes/Bonds		—		2,059,000		—		2,059,000
Subtotal		—		2,759,000		—		2,759,000

Long-term investments:
Corporate Notes/Bonds		—		5,605,000		—		5,605,000
Convertible debt		—		—		605,000		605,000
Subtotal		—		5,605,000		605,000		6,210,000

Current Liabilities:
Contingent Consideration		—		—		(550,000)		(550,000)
Subtotal		—		—		(550,000)		(550,000)

Total	$	9,424,000	$	8,364,000	$	55,000	$	17,843,000

The estimated fair value of contingent consideration as of December 31, 2020 was $550,000, as noted above. The estimated fair value is considered a level 3 measurement because the probability weighted discounted cash flow methodology used to estimate fair value includes the use of significant unobservable inputs, primarily the contractual contingent consideration revenue targets and assumed probabilities. The Company paid the full amount of the contingent consideration during the first quarter of 2021 and there was 0 liability at September 30, 2021.

We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no0 transfers between levels during the three ~~and nine~~ months ended September 30, ~~2020.~~2021.

~~NOTE 14 – GENERAL COMMITMENTS~~

On August 2, 2018, the Company entered into a purchase agreement with Launch Properties, LLC for the sale of the Company’s building located at 10900 Red Circle Drive, Minnetonka, MN for $10,000,000. The building currently includes the Company’s corporate administrative offices, as well as some operations for Transition Networks and JDL Technologies. This agreement was terminated on July 28, 2020 and earnest money totaling $225,000 was transferred to the Company and recognized as other income in the accompanying condensed consolidated statements of income (loss) and comprehensive income (loss) for the three and nine months ended September 30, 2020. The Company is reviewing options to continue to use or sell the property.

NOTE 1514 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard during the first quarter of 2020 with an immaterial impact to our consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, ~~“Financial~~"Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.”" The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

NOTE 1615 – SUBSEQUENT EVENTS

On November 3, 2020, the Company acquired the operating assets of privately held IVDesk Minnesota, Inc. (“IVDesk”) from a third party receiver (“Receiver”) appointed by Hennepin County, Minnesota State District Court Judge for aggregate consideration of up to $1,500,000. The transaction was structured as an asset purchase under which the Company paid $950,000 in cash at closing with up to an additional $550,000 payment contingent on an earn-out tied to customer retention. The Company ~~provided~~has evaluated subsequent events through the ~~Receiver as seller a $550,000 letter~~date of ~~credit~~this filing. We do not believe there are any material subsequent events other than those disclosed in the footnotes to ~~secure its obligation to pay the earn-out under the asset purchase agreement. IVDesk provides private cloud services to small- and mid-size businesses (SMB), with a particular focus on the~~these financial services industry. IVDesk currently services over 85 customers across the US with a focus on a tri-state region with Minnesota at the center. IVDesk’s business model is built on monthly recurring revenue.statements that require further disclosure.

‎

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Overview~~Recent Development: Proposed Merger with Pineapple Energy

As previously disclosed, on March 1, 2021, CSI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Helios Merger Co., a Delaware corporation and a wholly-owned subsidiary of CSI (the “Merger Sub”), Pineapple Energy LLC, a Delaware limited liability company (“Pineapple”), Lake Street Solar LLC, a Delaware limited liability company (the “Members’ Representative”), and Randall D. Sampson, as the Shareholders’ Representative (the “Shareholders’ Representative,” and together with CSI, the Merger Sub, Pineapple and the Members’ Representative, the “Parties”), pursuant to which Merger Sub will merge with and into Pineapple with Pineapple surviving the merger as a wholly owned subsidiary of CSI (the “Pineapple Merger”).

Simultaneously with the execution of the Merger Agreement, Pineapple entered into a Voting Agreement, dated March 1, 2021 (the “Voting Agreement”) with officers and director of CSI (the “CSI Holders”). The CSI Holders hold in the aggregate approximately 13.8% of CSI’s outstanding shares. Pursuant to the Voting Agreement, each CSI Holder has agreed, with respect to all of the voting securities of CSI that such CSI Holder beneficially owns as of the date thereof or thereafter, to vote in favor of the Merger. The Voting Agreement will terminate on the Effective Time (as defined therein) or upon termination of the Merger Agreement in accordance with its terms.

Pursuant to the Merger Agreement, at the closing of the Merger, CSI will enter into a Contingent Value Rights Agreement (the “CVR Agreement”) with a person designated by CSI as the Holders’ Representative (as defined therein), and the Rights Agent (as defined therein). Pursuant to the CVR Agreement, each shareholder of CSI as of immediately prior to the closing of the Merger will receive one non-transferable Contingent Value Right (“CVR”) for each outstanding share of common stock of CSI held as of the close of business on the day immediately before the Effective Time of the Merger, which will represent the right to receive pro-rata distributions of proceeds from Dispositions that occur following the Effective Time.

A detailed description of the Pineapple Merger, the Voting Agreement and the CVR Agreement is contained in the Form 8-K dated March 1, 2021, and the Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 31, 2021.

On November 12, 2021, the Company filed with the SEC a combined Form S-4 Registration Statement/Proxy Statement (the “Pineapple Merger Proxy Statement”). CSI urges investors, shareholders and other interested persons to read, when available, the definitive registration statement/proxy statement as well as other documents filed with the SEC because these documents will contain important information about CSI, Pineapple, and the proposed transaction. The definitive Pineapple Merger Proxy Statement will be mailed to CSI shareholders as of a record date to be established for voting on the proposed transaction. Shareholders will also be able to obtain a copy of the definitive Pineapple Merger Proxy Statement (when available), without charge, by directing a request to: Communications Systems, Inc., 10900 Red Circle Drive, Minnetonka, MN 55343. The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).

Overview

Except as otherwise expressly discussed, all operating results for 2020 and 2021 only reflect the Company’s continuing operations and exclude the discontinued operations of the Company’s former E&S and Suttle businesses.

Communications Systems, Inc. provides network infrastructure and services for global deployments of enterprise and industrial broadband networks through the following business ~~segments:~~segment:

~~Electronics~~Services & ~~Software~~Support

This segment is initially comprised of CSI’s Transition Networks and Net2Edge businesses. With over 30 years of growth and expertise in hardware and software development in this segment, the Company offers customers network solutions that provide secure, reliable connectivity and power through PoE products and actionable intelligence to end devices in an IoT ecosystem through embedded and cloud-based management software. In addition, this segment continues to generate revenue from its traditional products consisting of, media converters, NICs, and Ethernet switches that offer the ability to affordably integrate the benefits of fiber optics into any data network, in any application, and in any environment. The product portfolio gives customers simple, secure, and intelligent solutions for the network edge by offering support for multiple interface speeds, PoE options, and a broad array of protocols.

As data networks continue to change and evolve, the Company’ solutions enable customers to easily deploy, provision, and proactively manage their networks with actionable insights about their edge devices and connected end points, thereby minimizing the administrative burden of the operator. The Company distributes hardware-based connectivity solutions through a network of resellers in over 50 countries.

~~Services & Support~~

~~This segment is initially~~ comprised of CSI’s JDL Technologies and Ecessa Corporation businesses. With over 30 years of growth and expertise in managed services and, more recently, SD-WAN solutions in this segment, the Company offers customers:

●

Technology services and infrastructure in the commercial, healthcare, financial, and education market segments. The Company’s portfolio of technology solutions includes IT managed services supporting client infrastructures from the data center to the desktop, security products and services, cloud migrations, network virtualization and resiliency, wired and wireless network design and implementation, and converged infrastructure configuration and deployment. We provide many of these technology services to the education space, including having provided services to one of the largest school districts in the US for more than 30 years. We also provide these services to a number of commercial and healthcare clients.

●

~~SD-WAN Never Down~~^® networks, sold as a product or as a recurring service, enable organizations of all sizes to reliably run Internet and cloud-based applications, connect offices worldwide and distribute traffic among a fabric of multiple, diverse ISP links, ensuring business continuity by removing bottlenecks and eliminating network downtime. These capabilities optimize Never Down performance of business-critical applications, aid in lowering IT costs, and make it easier to provision, maintain and support business networks and the applications that run over them.

~~Except~~

Technology services and infrastructure in the commercial, healthcare, financial, and education market segments. The Company’s portfolio of technology solutions includes IT managed services supporting client infrastructures from the data center to the desktop, security products and services, cloud migrations, network virtualization and resiliency, wired and wireless network design and implementation, and converged infrastructure configuration and deployment. We provide many of these technology services to the education space, including having provided services to one of the largest school districts in the US for more than 30 years. We also provide these services to a number of commercial and healthcare clients.

SD-WAN Never Down^® networks, sold as ~~otherwise expressly discussed,~~a product or as a recurring service, enable organizations of all sizes to reliably run Internet and cloud-based applications, connect offices worldwide and distribute traffic among a fabric of multiple, diverse ISP links, ensuring business continuity by removing bottlenecks and eliminating network downtime. These capabilities optimize Never Down performance of business-critical applications, aid in lowering IT costs, and make it easier to provision, maintain and support business networks and the applications that run over them.

Third Quarter 2021 Summary

Consolidated sales were $1.8 million in Q3 2021 compared to $3.4 million in Q3 2020.

The Company incurred an operating ~~results for 2019 and 2020 only reflect the Company’s~~loss from continuing operations ~~and exclude the discontinued~~of $1.9 million in Q3 2021 compared to an operating loss from continuing operations of ~~the Company’s former Suttle business. Operating results for 2019 have been reclassified~~$965,000 in Q3 2020.

Net loss from continuing operations was $1.8 million, or ($0.19) per diluted share in Q3 2021, compared to ~~reflect the Company’s new segment reporting.~~net loss from continuing operations of $699,000, or ($0.07) per diluted share, in Q3 2020.

~~Third Quarter 2020 Summary~~

●

~~Consolidated sales were $12.1 million in Q3 2020 compared to $13.6 million in Q3 2019.~~

●

~~The Company incurred operating income from continuing operations of $306,000 in Q3 2020 compared to operating income from continuing operations of $772,000 in Q3 2019.~~

●

~~Net income from continuing operations was $554,000, or $0.06 per diluted share in Q3 2020, compared to net income from continuing operations of $887,000, or $0.10 per diluted share, in Q3 2019.~~

Forward-looking statements

In this report and, from time to time, in reports filed with the Securities and Exchange Commission (“SEC”), in press releases, and in other communications to shareholders or the investing public, the Company may make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We may make these forward-looking statements concerning possible or anticipated future financial performance,

business activities, plans, pending claims, investigations or litigation, which are typically preceded by the words “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could cause actual performance, activities, anticipated results, outcomes or plans to differ significantly from those indicated in the forward-looking statements. These risks and uncertainties include, but are not limited to:

General Risks and Uncertainties:

●

The ability of the Company’s two operating segments, Electronics & Software and Services & Support, to each function in an efficient, cost-effective manner and profitable manner, under the oversight of the CSI parent;

●

Any short-term or long-term effect that the COVID-19 Pandemic may have on the American and world economies generally, or us as a manufacturing entity, including our ability to manufacture, market, and sell our products while complying with applicable or otherwise appropriate social distancing policies, as discussed throughout the “Forward-looking statements” section and more thoroughly below in the section “Impact of COVID-19 Pandemic”;

●

~~Our ability to successfully and profitably integrate our new Ecessa subsidiary into our existing operations, particularly in the Services & Support segment;~~

●

~~Our ability to manage corporate costs incurred as a public company in an effective manner given our lower revenues and smaller scale as a result of the sale of Suttle operations;~~

●

~~The ability of our Board of Directors and our management leadership team to identify business development options for the Company and the Company’s ability to implement these plans;~~

●

~~The impact of changing government expenditures in our markets; and~~

●

~~The fact that our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to operate.~~

In addition to these factors and the specific factors related to the Company’s continuing segment described below, there are factors related to the Company’s sale of its E&S segment subsidiaries to Lantronix and the CSI-Pineapple merger transaction, including:

~~Electronics & Software Segment~~

Up to $7.0 million of the purchase price of the Company’s sale of its E&S segment business to Lantronix is structured in the form of an earnout based on revenues generated by Lantronix in the 360 days following closing, and there is no guaranty that sufficient revenues will be recognized for the earnout to be paid to the Company;

The fact that with the August 2, 2021 sale of the E&S segment business to Lantronix the Company will no longer be allocating a portion of its general and administrative expenses to this segment. Therefore, the Company expects its non-allocated general and administrative expenses, which are separately accounted for as “Other,” to increase in the remainder of 2021.

Conditions to the closing of the previously announced CSI-Pineapple merger transaction may not be satisfied or the merger may involve unexpected costs, liabilities or delays;

Related to the CSI-Pineapple announced merger, the Company’s ability to successfully sell its other existing operating business assets and its real estate assets at a value close to their current fair market value and distribute these proceeds to its existing shareholder base;

The fact that the continuing CSI-Pineapple entity will be entitled to retain ten percent of the net proceeds of CSI legacy assets that are sold pursuant to agreements entered into after the effective date of the CSI-Pineapple closing;

The occurrence of any other risks to consummation of the CSI-Pineapple merger, including the risk that the CSI-Pineapple merger will not be consummated within the expected time period or any event, change or other circumstances that could give rise to the termination of the CSI-Pineapple merger;

Risks that the CSI-Pineapple merger will disrupt current CSI plans and ~~Uncertainties:~~operations or that the business or stock price of CSI may suffer as a result of uncertainty surrounding the CSI-Pineapple merger;

●

The ability of this segment to develop and sell new products, including intelligent edge solutions, for new and existing markets at a level adequate to counter the decline in sales of its traditional products;

●

~~The ability to develop, field test, manufacture and sell new products in sufficient quantities to achieve profitability;~~

●

~~The ability to sustain meaningful product differentiation and achieve substantial gross margins;~~

●

~~Reliance on contract manufacturers and OEMs to supply it with components and products in a timely manner as we develop and introduce new products;~~

●

The fact that as this segment has more success in selling its products, including PoE products, as part of major infrastructure projects, it may experience significant fluctuations in quarter-to-quarter and year-to-year revenue and profitability; and

●

Our ability to manage an inventory of components and finished products that is complex and complicated by our need to maintain a significant inventory of components (i) that may be or become in short supply or discontinued by the component manufacturer, (ii) that must be purchased in bulk to obtain favorable pricing, or (iii) that require long lead times. These factors may result in this business segment purchasing and maintaining significant amounts of inventory, that if not used or expected to be used based on anticipated production requirements, (i) may become excess or obsolete and (ii) could result in sales price reductions or inventory write-downs that could adversely affect this business and results of operations.

The outcome of any legal proceedings related to the CSI-Pineapple merger;

The fact that CSI cannot yet determine the exact amount of the Contingent Value Rights that CSI intends to distribute to its shareholders immediately prior to the effective date of the CSI-Pineapple merger;
‎

Any short-term or long-term effect that the COVID-19 Pandemic may have on the American and world economies generally, or us as a manufacturing entity, including our ability to manufacture, market, and sell our products while complying with applicable or otherwise appropriate social distancing policies, as discussed throughout the “Forward-looking statements” section and more thoroughly below in the section “Impact of COVID-19 Pandemic”;

The fact that our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to operate.

Services & Support Segment Risks and Uncertainties:

Our ability to continue to obtain and manage the historically fluctuating business from our traditional South Florida school district customer, particularly because we were not selected as the primary vendor on the next multi-year project for this school district customer, but have been selected as the secondary vendor for structured cabling and enterprise networking;

●

~~Our ability to continue to obtain and manage the historically fluctuating business from its traditional South Florida school district customer;~~

Our ability to expand to other educational customers;
‎

●

~~Our ability to expand to other educational prospects;~~

Our ability to profitably increase our business serving SMB commercial businesses as well as any decreased spending by our existing SMB customers due to uncertainty or lower customer demand due to the COVID-19 pandemic;

●

Our ability to profitably increase our business serving small and medium-sized (“SMB”) commercial businesses as well as any decreased spending by our existing SMB customers due to uncertainty or lower customer demand due to the COVID-19 pandemic;

●

~~Our ability to successfully and profitably manage a large number of small accounts;~~

Our ability to successfully and profitably manage a large number of small accounts;

●

~~Our ability to establish and maintain a productive and efficient workforce;~~

●

~~Our ability to compete in a fast growing and large field of SD-WAN competitors, some whom have more features than our current product offering; and~~

Our ability to establish and maintain a productive and efficient workforce;

●

~~Our ability to integrate the recently acquired Ecessa SD-WAN business and the IVDesk private cloud services into the Services & Support operating segment.~~

Our ability to compete in a fast growing and large field of SD-WAN competitors, some of whom have more features than our current product offering; and

Our ability to continue to integrate the recently acquired Ecessa SD-WAN business and the IVDesk private cloud services into this operating segment.

The Company discusses these and other risk factors from time to time in its filings with the SEC, including risk factors presented under Item 1A of the ~~Company’s~~Company's most recently filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Impact of COVID-19 Pandemic

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. In response to the pandemic, we instituted temporary office closures, implemented shelter-in-place orders and restrictions, ~~and~~ instituted a mandatory work from home policy for substantially all office employees, and instituted social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders. We experienced supply chain and demand disruptions during the first nine months of 2020 and expect the disruption to our supply to continue throughout 2020, as well as higher logistics and operational costs due to the COVID-19 pandemic. At the same time, we have seen an increase in demand for our fiber and high-speed products as customers are looking to upgrade their networks. As noted below, we are also seeing delays in orders as some projects are pushed out due to the inability to access locations due to the shutdowns. We may also see a slowdown in our business if one or more of our major customer or suppliers delays its purchase or supplies due to uncertainty in its business operations, encounters difficulties in its production due to employee safety or workforce concerns, is unable to obtain materials or labor from third parties that it needs to complete its projects, and may see a slowdown in our collection of receivables if our customers encounter cash flow difficulties or delay payments to preserve their cash resources. We are continuing to actively monitor the effects and potential impacts of the COVID-19 pandemic on all aspects of our business, liquidity and capital resources. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain at this time.

Three Months Ended September 30, 2021 Compared to

Three Months Ended September 30, 2020 ~~Compared to~~

~~Three Months Ended September 30, 2019~~

Consolidated sales ~~declined 11.1%~~decreased 45.5% in the third quarter of ~~2020~~2021 to ~~$12,110,000~~$1,828,000 compared to ~~$13,622,000~~$3,354,000 in the same period of ~~2019.~~2020. Consolidated operating ~~income~~loss from continuing operations in the third quarter of ~~2020 decreased~~2021 increased to ~~$306,000~~$1,868,000 from an operating ~~income~~loss from continuing operations of ~~$772,000~~$965,000 in the third quarter of ~~2019.~~2020. Net ~~income~~loss from continuing operations in the third quarter of ~~2020~~2021 was ~~$554,000~~$1,803,000 or ~~$0.06~~$ (0.19) per diluted share compared to net ~~income~~loss from continuing operations of ~~$887,000~~$699,000 or ~~$0.10~~$ (0.07) per diluted share in the third quarter of ~~2019.~~2020.

~~Electronics~~Services & ~~Software~~Support

~~Electronics~~Services & ~~Software~~Support sales decreased ~~33%~~45% to ~~$8,755,000~~$1,947,000 in the third quarter of ~~2020~~2021 compared to $13,035,000 in 2019. The Electronics & Software segment organizes its sales force by vertical markets and segments its customers geographically. Third quarter sales by region are presented in the following table:

Electronics & Software Sales by Region
2020 2019
North America $ 7,672,000 $ 11,479,000
International 1,083,000 1,556,000
$ 8,755,000 $ 13,035,000

~~The following table summarizes the 2020 and 2019 third quarter sales by its major product groups:~~

Electronics & Software Sales by Product Group
2020 2019
Intelligent edge solutions $ 2,990,000 $ 5,791,000
Traditional products 5,765,000 7,244,000
$ 8,755,000 $ 13,035,000

Sales in North America decreased $3,807,000, or 33%, primarily due to delayed project spending by customers due to the COVID-19 pandemic in addition to $2,820,000 of sales for a major metropolitan smart city IoT project recorded in the prior year, that did not reoccur in the current year and delayed spending from a major Canadian telecommunications provider. International sales decreased $473,000, or 30%, primarily due to an overall drop in demand for traditional products and delayed project spending by customers due to the economic effects of the COVID-19 pandemic. Sales of Intelligent edge solutions (“IES”) products decreased 48% or $2,801,000 due to the $2,820,000 of deliveries in the prior year related to the major metropolitan smart city IoT projects that did not reoccur. Traditional product sales decreased 20% or $1,479,000 due mainly to a decline in media converter and optical device orders from one major telecommunications customer.

Gross profit on third quarter sales decreased to $4,009,000 in 2020 from $6,282,000 in 2019. Gross margin decreased to 45.8% in the third quarter of 2020 from 48.2% in 2019 primarily due to the volume and favorable margin impacts from the prior year major metropolitan smart city IoT project that did not reoccur this year. Selling, general and administrative expenses decreased 26% to $3,281,000, or 37.5% of sales, in the third quarter of 2020 compared to $4,419,000, or 33.9% of sales, in 2019 due to reduced travel, marketing and personnel expenses, in part due to steps taken by management in response to the COVID-19 pandemic.

~~Electronics & Software incurred operating income of $728,000 in the third quarter of 2020 compared to operating income of $1,863,000 in 2019, primarily due to lower sales and gross margin.~~

~~Services & Support~~

~~Services & Support sales increased 351%~~ to $3,530,000 in the third quarter of ~~2020 compared to $783,000 in 2019.~~2020.

Revenues by customer group were as follows:

Services & Support Revenue by Customer Group
2020 2019
Education $ 2,312,000 $ 63,000
Healthcare 244,000 175,000
Financial and other commercial clients 799,000 353,000
CSI IT operations 175,000 192,000
$ 3,530,000 $ 783,000


	Services & Support Revenue by Customer Group
		2021		2020
Financial	$	482,000	$	117,000
Healthcare		261,000		244,000
Education		64,000		2,312,000
Other commercial clients		1,021,000		682,000
CSI IT operations		119,000		175,000
	$	1,947,000	$	3,530,000

Revenues by revenue type were as follows:

Services & Support Revenue by Type
2020 2019
Project & product revenue $ 2,611,000 $ 130,000
Services & support revenue 919,000 653,000
$ 3,530,000 $ 783,000
— —


	Services & Support Revenue by Type
		2021		2020
Project & product revenue	$	297,000	$	2,611,000
Services & support revenue		1,650,000		919,000
	$	1,947,000	$	3,530,000

Revenues from the education sector ~~increased $2,249,000~~decreased $2,248,000 or ~~3570%~~97% in the third quarter of ~~2020~~2021 as compared to the ~~2019~~2020 third quarter due ~~primarily~~ to the ~~commencement~~substantial completion of projects ~~that had been previously delayed due to funding issues where~~from the ~~same quarter of~~Company’s Florida school district customer in the prior ~~year had very little~~year. The Company was not selected as the primary vendor on the next multi-year project ~~revenue in~~for this ~~sector.~~ school district, but has been selected as the secondary vendor for structured cabling and enterprise networking.

Revenue from sales to SMBs, which are primarily financial, healthcare and ~~financial~~commercial clients increased ~~$515,000~~$721,000 or ~~98%~~69% in the third quarter of ~~2020 as compared to 2019 due to~~ ~~the acquisition of Ecessa effective May 14, 2020. Project and product revenue increased $2,481,000 or 1908% in the third quarter of 2020~~2021 as compared to the third quarter of ~~2019~~2020 due ~~primarily~~to the acquisition of the assets of IVDesk on November 3, 2020. Project and product revenue decreased $2,314,000 or 89% in the third quarter of 2021 as compared to the ~~increase~~third quarter of 2020 primarily due to the decrease in the education sector. Services and support revenue increased ~~$266,000~~$731,000 or ~~41%~~80% as compared to the same quarter of the prior year due to ~~new client acquisition within managed services and~~ the Company’s acquisition of Ecessa ~~which has~~and its service and support revenue on its SD-WAN ~~products. Overall, Ecessa~~products as well as the acquisition of IVDesk, which contributed ~~$535,000~~$634,000 in revenue during the quarter. Overall, Ecessa contributed $565,000 in revenue during the quarter, an increase of $30,000 over the third quarter of the prior year.

Gross profit ~~increased 644%~~decreased 38% to ~~$1,340,000~~$834,000 in the third quarter of ~~2020~~2021 compared to ~~$180,000~~$1,340,000 in the same period in ~~2019.~~2020 due to the decrease in the education sector revenue. Gross margin increased to 42.8% in the third quarter of 2021 compared to 38.0% in the third quarter of 2020 ~~compared to 23.0% in 2019~~ due to the increase in ~~projects in the education sector during the third quarter of 2020, while there was limited project~~services & support revenue, ~~in the prior year, resulting in lower 2019 gross~~which has higher margins. Selling, general and administrative expenses ~~increased 160%~~decreased 17% in the third quarter of 2021 to $669,000, or 34.4% of sales, compared to $803,000, or 22.7% of sales, in the third quarter of 2020 due to $909,000, or 25.8% of sales, compared to $349,000, or 44.6% of sales, in 2019 due the May 14, 2020 acquisition of Ecessa and the inclusion of its general and administrative costs that are not included in the prior year.lower compensation related expenses on lower headcount.

Services & Support reported operating income of ~~$431,000~~$55,000 in the third quarter of ~~2020~~2021 compared to an operating ~~loss~~income of ~~$169,000~~$431,000 in the same period of ~~2019~~2020, primarily due to ~~increased~~lower revenues into the education ~~revenue.~~sector.

Other

~~As a result of our treatment of Suttle as discontinued operations, “Other”~~“Other” includes non-allocated corporate overhead costs ~~as well as costs allocated to Suttle~~ that are not considered discontinued operations. In

Other corporate costs increased by $527,000 due to outside legal and financial consulting costs related to the ~~past,~~previously announced Pineapple Energy merger and additional expense related to the ~~Company would estimate annual revenue and headcount for each principal business unit and then allocate a portion~~accelerated vesting of shared service corporate overhead costs based on these metrics. Because Suttle is now treated as discontinued operations, these costs are now included within “Other.” The Company is currently examining how to allocate these costs in the future given its sale of Suttle, acquisition of Ecessa and realignment of its operation into its Electronics & Software and Services & Support segments.all outstanding equity awards.

Income Taxes

The Company’s ~~income~~loss from continuing operations before income taxes was ~~$563,000~~$1,798,000 in the third quarter of ~~2020~~2021 compared to ~~income~~a loss from continuing operations before income taxes of ~~$860,000~~$690,000 in the third quarter of ~~2019.~~2020. The Company’s effective income tax rate was ~~1.6%~~(0.3%) in the third quarter of ~~2020~~2021 and ~~(3.1%~~(1.3%) in ~~2019.~~2020. This effective tax rate for ~~2020~~2021 differs from the federal tax rate of 21% due to state income taxes, ~~foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes,~~ the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. As of December 31, ~~2019,~~2020, the Company had a federal net operating loss carryforward from 2015 through ~~2019~~2020 activity of approximately ~~$7,687,000~~$10,940,000 that is available to offset future taxable income and begins to expire in 2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023. The Company expects to offset a substantial portion of the loss carryforwards against the gain on sale of the E&S segment in 2021.

Nine Months Ended September 30, 2021 Compared to

Nine Months Ended September 30, 2020 ~~Compared to~~

~~Nine Months Ended September 30, 2019~~

Consolidated sales decreased ~~13%~~slightly in the first nine months of ~~2020~~2021 to ~~$30,900,000~~$5,313,000 compared to ~~$35,543,000~~$5,321,000 in the same period of ~~2019.~~2020. Consolidated operating loss from continuing operations in the first nine months of ~~2020 was $2,564,000 compared~~2021 increased to $6,156,000 from an operating loss from continuing operations of ~~$1,179,000~~$4,044,000 in the ~~same period~~first nine months of ~~2019.~~2020. Net loss from continuing operations in the first nine months of ~~2020~~2021 was ~~$1,622,000~~$6,328,000 or $ ~~(0.17)~~(0.65) per diluted share compared to net loss from continuing operations of ~~$955,000~~$3,100,000 or $ ~~(0.11)~~(0.33) per diluted share in the first nine months of ~~2019.~~2020.

~~Electronics~~Services & ~~Software~~Support

~~Electronics~~Services & ~~Software~~Support sales decreased ~~21%~~3% to ~~$25,579,000~~$5,719,000 in the first nine months of ~~2020~~2021 compared to $32,262,000 in 2019. The Electronics & Software segment organizes its sales force by vertical markets and segments its customers geographically. First nine-month sales by region are presented in the following table:

Electronics & Software Sales by Region
2020 2019
North America $ 22,019,000 $ 26,448,000
International 3,560,000 5,814,000
$ 25,579,000 $ 32,262,000

~~The following table summarizes the segment’s 2020 and 2019 first nine-month sales by its major product groups:~~

Electronics & Software Sales by Product Group
2020 2019
Intelligent edge solutions $ 9,368,000 $ 10,846,000
Traditional products 16,211,000 21,416,000
$ 25,579,000 $ 32,262,000

Sales in North America decreased $4,429,000, or 17%, primarily due to delayed project spending by customers due to the effect of the COVID-19 pandemic, $2,820,000 of sales for a major metropolitan smart city IoT project recorded in the prior year, that did not reoccur in the current year, and a decline in sales to major Canadian telecommunications customer, partially offset by strong sales to Federal agencies. International sales decreased $2,254,000, or 39%, primarily due to an overall drop in demand for traditional products and the economic effects of the COVID-19 pandemic. Sales of Intelligent edge solutions (“IES”) products decreased 14% or $1,478,000 due to $2,820,000 of deliveries in the prior year for a major metropolitan smart city IoT project that did not reoccur this year, partially offset by higher sales of security and surveillance products and sales to Federal agencies. Traditional product sales decreased 24% or $5,205,000 due mainly to a decline in media converter orders from major telecommunications customers.

~~Gross profit on first nine-month sales decreased to $10,834,000 in 2020 as compared to $14,370,000 in 2019. Gross margin decreased to 42.4%~~$5,882,000 in the first nine months of 2020.

Revenues by customer group were as follows:



	Services & Support Revenue by Customer Group
		2021		2020
Financial	$	1,306,000	$	314,000
Healthcare		760,000		674,000
Education		212,000		3,031,000
Other commercial clients		3,035,000		1,302,000
CSI IT operations		406,000		561,000
	$	5,719,000	$	5,882,000

Revenues by revenue type were as follows:



	Services & Support Revenue by Type
		2021		2020
Project & product revenue	$	927,000	$	3,498,000
Services & support revenue		4,792,000		2,384,000
	$	5,719,000	$	5,882,000

Revenues from the education sector decreased $2,819,000 or 93% in the first nine months of 2021 as compared to the 2020 first nine months due to the substantial completion of projects from ~~44.5%~~the Company’s Florida school district customer in ~~2019~~the prior year. The Company was not selected as the primary vendor on the next multi-year project for this school district, but has been selected as the secondary vendor for structured cabling and enterprise networking.

Revenue from sales to SMBs, which are primarily financial, healthcare and commercial clients increased $2,811,000 or 123% in the first nine months of 2021 as compared to the first nine months of 2020 due to the acquisition of Ecessa on May 14, 2020 and the acquisition of the assets of IVDesk on November 3, 2020. Project and product revenue decreased $2,571,000 or 73% in the first nine months of 2021 as compared to the first nine months of 2020 primarily due to the ~~volume~~decrease in the education sector. Services and ~~favorable margin impacts from~~support revenue increased $2,408,000 or 101% as compared to the same period of the prior year ~~major metropolitan smart city IoT project that did not reoccur this year,~~due to the Company’s acquisition of Ecessa and its service and support revenue on its SD-WAN products as well as the acquisition of IVDesk, which contributed $1,847,000 in revenue during the first nine months. Overall, Ecessa contributed $1,736,000 in revenue during the first nine months, an increase of $938,000 over the same period of the prior year.

Gross profit increased ~~sales~~8% to $2,260,000 in the first nine months of ~~some IES products~~2021 compared to ~~Federal agencies at lower margins, partially offset by lower inventory write-downs year over year.~~$2,090,000 in the same period in 2020. Gross margin increased to 39.5% in the first nine months of 2021 compared to 35.5% in 2020 due to the increase in services & support revenue, which has higher margins. Selling, general and administrative expenses ~~decreased 18%~~increased 42% in the first nine months of 2021 to ~~$10,816,000,~~$2,290,000, or ~~42.3%~~40.0% of sales, compared to $1,614,000, or 27.4% of sales, in the first nine months of 2020 ~~compared to $13,116,000, or 40.7% of sales, in 2019 due to reduced travel, marketing and personnel expenses, in part due to steps taken by management in response to the COVID-19 pandemic.~~

Electronics & Software had operating income of $18,000 in the first nine months of 2020 compared to operating income of $1,254,000 in the same period of 2019, primarily due to lower sales and gross margin.

~~Services & Support~~

~~Services & Support sales increased 49% to $5,882,000 in the first nine months of 2020 compared to $3,942,000 in 2019.~~

~~Revenues by customer group were as follows:~~

Services & Support Revenue by Customer Group
2020 2019
Education $ 3,031,000 $ 1,831,000
Healthcare 674,000 551,000
Financial and other commercial clients 1,616,000 902,000
CSI IT operations 561,000 658,000
$ 5,882,000 $ 3,942,000

~~Revenues by revenue type were as follows:~~

Services & Support Revenue by Type
2020 2019
Project & product revenue $ 3,498,000 $ 2,124,000
Services & support revenue 2,384,000 1,818,000
$ 5,882,000 $ 3,942,000

Revenues from the education sector increased $1,200,000, or 66%, in the first nine months of 2020 as compared to the same period in 2019 due primarily to the commencement of projects that had been previously delayed due to funding issues where the same quarter of the prior year had very little project revenue in this sector. Projects for this customer commenced at the end of the second quarter of 2020. Revenue from sales to SMBs, which are primarily healthcare, financial and commercial clients increased $837,000, or 58%, in the first nine months of 2020 as compared to 2019 due to ~~new client acquisition and rate increases in our commercial services division as well as the acquisition of Ecessa on May 14, 2020~~. The decrease in the CSI IT operations revenue as compared to the first nine months of 2019 is related to hardware refresh revenue in the prior year that was not repeated in the current year. Project and product revenue increased $1,374,000 or 65% in the first nine months of 2020 as compared to the first nine months of 2019 due primarily to the increase in the education sector. Services and support revenue increased $566,000 or 31% as compared to the same quarter of the prior year due to new client acquisition within managed services and the Company’s acquisition of Ecessa, which has service and support revenue on its SD-WAN products. Overall, Ecessa contributed $798,000 in revenue during the year.

Gross profit increased 61% to $2,090,000 in the first nine months of 2020 compared to $1,299,000 in the same period in 2019. Gross margin increased to 35.5% in the first nine months of 2020 compared to 33.0% in 2019 due to the increase in project revenue in the education sector, primarily within the third quarter. Selling, general and administrative expenses increased 63% in the first nine months of 2020 to $1,720,000, or 29.2% of sales, compared to $1,056,000, or 26.8% of sales, in 2019 due to the May 2020 acquisition of Ecessa and the November 2020 acquisition of IVDesk, and the inclusion of ~~its~~their associated general and administrative costs, ~~that~~which are not included in the prior year.

~~The~~Services & Support reported an operating ~~income was~~loss of ~~$370,000~~$376,000 in the first nine months of ~~2020~~2021 compared to operating income of ~~$243,000~~$370,000 in the same period of ~~2019~~2020, primarily due to decreased revenue from the education sector and increased ~~education revenue.~~selling, general and administrative expenses, including an increase in amortization expense of $240,000.

~~Other~~

Other

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

“Other” includes non-allocated corporate overhead costs ~~as well as costs allocated to Suttle~~ that are not considered discontinued operations. InOther corporate costs increased by $1,366,000 due to outside legal and financial consulting costs related to the past, the Company would estimate annual revenue and headcount for each principal business unit and then allocate a portion of shared service corporate overhead costs based on these metrics. Because Suttle is now treated as discontinued operations, these costs are now included within “Other.” As noted above, the Company is currently examining how to allocate these costs in the future given its sale of Suttle, acquisition of Ecessa and realignment of its operations into its Electronics & Software and Services & Support segments.previously announced Pineapple Energy merger.

Income Taxes

The Company’s loss from continuing operations before income taxes was ~~$1,618,000~~$6,322,000 in the first nine months of ~~2020~~2021 compared to a loss from continuing operations before income taxes of ~~$998,000~~$3,096,000 in the first nine months of ~~2019.~~2020. The Company’s effective income tax rate was ~~(0.3%~~(0.1%) in the first nine months of ~~2020~~2021 and ~~4.3%~~(0.1%) in ~~2019.~~2020. This effective tax rate for ~~2020~~2021 differs from the federal tax rate of 21% due to state income taxes, ~~foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes,~~ the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. As of December 31, ~~2019,~~2020, the Company had a federal net operating loss carryforward from 2015 through ~~2019~~2020 activity of approximately ~~$7,687,000~~$10,940,000 that is available to offset future taxable income and begins to expire in 2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023. The Company expects to offset a substantial portion of the loss carryforwards against the gain on sale of the E&S segment in 2021.

Liquidity and Capital Resources

As of September 30, ~~2020,~~2021, the Company had ~~$20,953,000~~$40,940,000 in cash, cash equivalents, restricted cash, and liquid investments. Of this amount, ~~$7,189,000~~$33,138,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash. The Company also had ~~$11,578,000~~$5,655,000 in investments consisting of ~~commercial paper and~~ corporate notes and bonds that are traded on the open market and are classified as available-for-sale at September 30, ~~2020.~~2021.

The Company had working capital of ~~$28,474,000~~$3,541,000 at September 30, 2021, consisting of current assets of approximately $41,471,000 and current liabilities of $37,930,000 compared to working capital of $28,320,000 at December 31, 2020 consisting of current assets of ~~approximately $36,256,000~~$35,758,000 and current liabilities of ~~$7,782,000 compared to working capital of $38,052,000 at December 31, 2019 consisting of current assets of $49,402,000 and current liabilities of $11,350,000.~~$7,438,000.

Cash flow used in operating activities was approximately ~~$5,580,000~~$2,626,000 in the first nine months of ~~2020 and $5,809,000 generated~~2021 as compared to $5,580,000 used in the same period of ~~2019.~~2020. Significant working capital changes from December 31, ~~2019~~2020 to September 30, ~~2020~~2021 included a decrease in receivables of $2,238,000 and an increase in ~~inventories~~payables of ~~$1,230,000 and $1,526,000 used in discontinued operations.~~$1,007,000.

Net cash provided by investing activities was ~~$1,183,000~~$26,329,000 in first nine months of ~~2020~~2021 compared to ~~$926,000 used in 2019,~~$1,183,000 2020, due to $23,625,000 in proceeds from the ~~Suttle sale, included~~E&S Sale Transaction in discontinued ~~operations, and proceeds from the maturity of investments, partially offset by additional investment purchases and net cash paid for the Ecessa acquisition.~~operations.

Net cash used in financing activities was ~~$827,000~~$1,565,000 in the first nine months of ~~2020~~2021 compared to ~~$598,000~~$827,000 used in financing activities in ~~2019.~~2020. The Company paid $550,000 in contingent consideration related to the November 2020 IVDesk acquisition. Cash dividends paid on common stock ~~increased~~decreased to $16,000 in 2021 from $564,000 in 2020 ($~~0.06~~0.04 per common share) ~~from $557,000~~. Dividends paid in ~~2019 ($0.06 per common share).~~the first nine months of 2021 consisted only of accrued dividends that were paid on deferred stock or restricted stock units that vested and were issued in 2021. Proceeds from common stock issuances, principally ~~issued under~~related to the ~~Company’s Employee Stock Purchase Plan,~~accelerated vesting of all outstanding equity

awards, totaled approximately $3,813,000 in 2021 and $91,000 in ~~2020 and $155,000 in 2019.~~2020. The Company acquired ~~$70,000~~$1,073,000 and ~~$2,000 in 2020 and 2019, respectively,~~$70,000 of Company stock from employees in 2021 and 2020, respectively, to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans. The Company ~~also~~has not acquired ~~$284,000~~Company stock during the first nine months of ~~Company stock~~2021 under a $2,000,000 Stock Repurchase Program authorized by the Board of Directors in August 2019. At September 30, ~~2020,~~2021, there remained $341,000 under the 2019 Stock Repurchase Program. See “Issuer Purchases of Equity Securities” in Part II, Item 2 of this Form 10-Q.

Line of Credit

~~As discussed above in Note 9, on~~On August 28, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, establishing a ~~$5,000,000~~$5.0 million line of credit facility that replaced a prior facility. On October 29, 2020, the Company entered into a First Amendment to the Credit Agreement. Under the Credit Agreement, as amended, the Company ~~has~~had the ability to obtain one or more letters of credit in an aggregate amount up to $2.0 million, subject to the general terms of the Credit Agreement.

The Company ~~had no outstanding borrowings against~~terminated the line of credit, or the prior facility, at September 30, 2020 and $3,976,000 was available for use. Due to the revolving nature of loans under this credit facility, additional borrowings and periodic repayments and re-borrowings may be made until the maturity date. Interest on borrowings on the credit line is at LIBOR plus 1.25%, with a minimum LIBOR rate of 0.75% (2.0% at September 30, 2020). The Credit Agreement ~~expires~~effective August ~~28, 2021 and is secured by government securities owned and pledged by the Company.~~13, 2021.

As described in Note 16, in connection with the Company’s November 3, 2020 purchase of the operating assets of privately held IVDesk from a third party Receiver, the Company provided the Receiver as seller a $550,000 letter of credit to secure the Company’s obligation to pay the earn-out under the asset purchase agreement. The letter of credit was issued pursuant to the line of credit with Wells Fargo.

In the opinion of management, based on the Company’s current financial and operating position and projected future expenditures, sufficient funds are available to meet the Company’s anticipated operating and capital expenditure ~~needs.~~needs.

PIPE Offering

On September 15, 2021, CSI entered into a securities purchase agreement with a group of institutional investors (the “PIPE Investors”) to make a $32.0 million private placement investment in CSI in connection with the closing of the previously announced merger between CSI and Pineapple Energy, LLC (“Pineapple”). Proceeds of this investment will be used primarily to fund Pineapple strategic initiatives. The closing of the financing is subject to approval of CSI’s shareholders. See further information in Note 9 in Notes to Financial Statements.

Cash Dividend

On September 13, 2021, CSI announced that its board of directors had declared a special dividend of $3.50 per share payable on October 15, 2021 to CSI shareholders of record at the close of business on September 30, 2021. The aggregate amount of the special dividend was approximately $34.0 million, which was funded from the net proceeds of the E&S Sale Transaction and CSI’s existing cash on hand.

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are discussed in our ~~2019~~2020 Form 10-K in Note 1 Summary of Significant Accounting Policies included in our Consolidated Financial Statements. There were no other significant changes to our critical accounting policies during the nine months ended September 30, ~~2020.~~2021.

The Company’s accounting policies have been consistently applied in all material respects and disclose matters such as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset impairment recognition, and foreign currency translation. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these

estimates due to actual outcomes being different from those on which we based our assumptions. Management reviews these estimates and judgments on an ongoing basis.

Recently Issued Accounting Pronouncements

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note ~~15,~~14, Recent Accounting Pronouncements, to the Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The Company has no freestanding or embedded derivatives. The Company’s policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales.

The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically not been material to the Company. ~~At September 30, 2020 our bank line of credit carried a variable interest rate based on LIBOR plus 1.25%. As noted above, we had no outstanding borrowings at September 30, 2020.~~

Based on the Company’s operations, in the opinion of management, no material future losses or exposure exist relative to market risk.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on that evaluation, as detailed below, management concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, we concluded that our internal control over financial reporting was effective.

‎

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable.

Item 1A. Risk Factors

~~Not Applicable.~~

In addition to the Risk Factors included set forth under Item 1A Risk Factors in the Company’s Form 10-K for the year ended December 31, 2020, and in factors included in this Form 10-Q, in the section “Management's Discussion and Analysis of Financial Condition and Result of Operations, Forward-Looking Statements, General Risks and Uncertainties and Services & Support Segment Risks and Uncertainties,” we are including the following specific Risk Factors.

Part of the purchase price of our E&S Sale Transaction is subject to an earnout.

Up to $7.0 million of the purchase price of the Company’s sale of its E&S segment business to Lantronix is structured in the form of an earnout based on revenues generated by Lantronix in the 360 days following closing, and there is no guaranty that sufficient revenues will be recognized for the earnout to be paid to the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities (registered pursuant to Section 12 of the Exchange Act)

In the three months ending September 30, ~~2020,~~2021, the Company repurchased shares of stock as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 2020 2,989 $ 4.85 — $ 562,042
August 2020 6,000 4.80 6,000 533,242
September 2020 50,000 3.84 50,000 341,242
Total 58,989 $ 3.99 56,000 $ 341,242

~~(1)~~

~~The total number of shares purchased includes: shares purchased under the Board’s authorization, including market purchases and privately negotiated purchases~~.



ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares Purchased (1)		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(b) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 2021	—	$	—	—	$	341,242
August 2021	647,893		7.15	—		341,242
September 2021	—		—	—		341,242
Total	647,893	$	7.15	—	$	341,242

(1)The total number of shares purchased generally includes shares purchased under the Board’s authorization, including market purchases and privately negotiated purchases, but in this quarter consisted solely of shares purchased by the Company in connection with the net exercise of options or share withholding with respect to the exercise of options or vesting of restricted stock units by employees.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits.

The following exhibits are included herein:


31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2

~~31.2~~

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

32	~~32.~~	Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
99.1	Press Release dated November 15, 2021 Announcing 2021 Third Quarter Results
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

~~Signatures~~

‎

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.


	Communications Systems, Inc.

	By	By	/s/ Roger H.D. Lacey
			Roger H.D. Lacey
Date: November ~~12, 2020~~15, 2021			Interim Chief Executive Officer



By	/s/ Mark Fandrich
		Mark Fandrich
Date: November ~~12, 2020~~15, 2021		Chief Financial Officer

	Nine Months Ended September 30
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(168,523	)	$	4,751,150
Net income from discontinued operations, net of tax		1,453,289			5,706,338
Net loss from continuing operations		(1,621,812	)		(955,188	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		740,531			806,169
Share based compensation		319,777			276,236
Deferred taxes		9,534			—
(Gain) loss on sale of assets		(303,899	)		20,152
Changes in assets and liabilities:
Trade accounts receivable		54,701			(402,333	)
Inventories		(1,230,228	)		2,258,386
Prepaid income taxes		(15,587	)		65,772
Other assets, net		(21,031	)		(43,385	)
Accounts payable		(655,111	)		(421,309	)
Accrued compensation and benefits		(663,272	)		404,422
Other accrued liabilities		(666,979	)		158,112
Income taxes payable		—			(28,267	)
Net cash (used in) provided by operating activities - continuing operations		(4,053,376	)		2,138,767
Net cash (used in) provided by operating activities - discontinued operations		(1,526,458	)		3,669,947
Net cash (used in) provided by operating activities		(5,579,834	)		5,808,714
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(182,842	)		(326,291	)
Acquisition of business, net of cash acquired		(3,975,894	)		—
Purchases of investments		(18,415,534	)		(8,593,711	)
Proceeds from the sale of property, plant and equipment		420,000			—
Proceeds from the sale of investments		15,277,710			3,090,437
Net cash used in investing activities - continuing operations		(6,876,560	)		(5,829,565	)
Net cash provided by investing activities - discontinued operations		8,059,110			4,903,856
Net cash provided by (used in) investing activities		1,182,550			(925,709	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid		(563,766	)		(556,966	)
Proceeds from issuance of common stock, net of shares withheld		90,832			(41,486	)
Purchase of common stock		(354,221	)		—
Net cash used in financing activities		(827,155	)		(598,452	)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH		(7,725	)		(41,789	)

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(5,232,164	)		4,242,764

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD		14,607,510			11,056,426
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	9,375,346		$	15,299,190
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid (refunded)	$	10,102		$	(73,151	)
Interest paid		25,387			28,508
Dividends declared not paid		16,637			197,220
Capital expenditures in accounts payable		—			—
Operating right of use assets obtained in exchange for lease obligations		208,650			449,995

	Foreign Currency Translation			Unrealized gain (loss) on securities			Accumulated Other Comprehensive Loss
December 31, 2019	$	(709,000	)	$	11,000		$	(698,000	)

Net current period change		(60,000	)		(5,000	)		(65,000	)

September 30, 2020	$	(769,000	)	$	6,000		$	(763,000	)

	Electronics & Software Sales by Region
	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
North America	$	7,672,000	$	11,479,000	$	22,019,000	$	26,448,000
International		1,083,000		1,556,000		3,560,000		5,814,000
	$	8,755,000	$	13,035,000	$	25,579,000	$	32,262,000


September 30, 2020

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash Equivalents		Short-Term Investments		Long-Term Investments

Cash equivalents:
Money Market funds	$	7,189,000	$	—	$	—		$	7,189,000	$	7,189,000	$	—	$	—
Subtotal		7,189,000		—		—			7,189,000		7,189,000		—		—

Investments:
Commercial Paper		3,898,000		2,000		—			3,900,000		—		3,900,000		—
Corporate Notes/Bonds		7,687,000		—		(9,000	)		7,678,000		—		1,365,000		6,313,000
Convertible Debt		355,000		—		—			355,000		—		—		355,000
Subtotal		11,940,000		2,000		(9,000	)		11,933,000		—		5,265,000		6,668,000

Total	$	19,129,000	$	2,000	$	(9,000	)	$	19,122,000	$	7,189,000	$	5,265,000	$	6,668,000


	Amortized Cost		Estimated Market Value

Due within one year	$	5,264,000	$	5,265,000
Due after one year through five years		6,676,000		6,668,000
	$	11,940,000	$	11,933,000

	Options			Weighted average exercise price per share		Weighted average remaining contractual term in years
Outstanding – December 31, 2019		1,130,472		$	7.28		3.48
Awarded		159,301			5.22
Exercised		(8,000	)		2.64
Forfeited		(46,369	)		11.11
Outstanding – September 30, 2020		1,235,404			6.90		3.33

Exercisable at September 30, 2020		961,317		$	7.58		2.65
Expected to vest September 30, 2020		1,235,404			6.90		3.33

	Shares			Weighted Average Grant Date Fair Value
Outstanding – December 31, 2019		321,227		$	3.37
Granted		89,131			5.39
Vested		(56,352	)		2.64
Forfeited		(79,787	)		4.24
Outstanding – September 30, 2020		274,219			3.92

	Electronics & Software			Services & Support		Other			Intersegment Eliminations			Total

Three Months Ended September 30, 2020
Sales	$	8,755,000		$	3,530,000	$	—		$	(175,000	)	$	12,110,000
Cost of sales		4,746,000			2,190,000		—			(8,000	)		6,928,000
Gross profit		4,009,000			1,340,000		—			(167,000	)		5,182,000
Selling, general and administrative expenses		3,281,000			909,000		782,000			(167,000	)		4,805,000
Acquisition costs		—			—		71,000			—			71,000
Operating income (loss)		728,000			431,000		(853,000	)		—			306,000
Other (expense) income		(18,000	)		—		275,000			—			257,000
Income (loss) before income tax	$	710,000		$	431,000	$	(578,000	)	$	—		$	563,000

Depreciation and amortization	$	71,000		$	146,000	$	94,000		$	—		$	311,000

Capital expenditures	$	14,000		$	—	$	79,000		$	—		$	93,000

Assets	$	16,600,000		$	9,034,000	$	30,110,000		$	(27,000	)	$	55,717,000