XML 33 R20.htm IDEA: XBRL DOCUMENT

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Description of Business [Policy Text Block]

Description of Business

TSS, Inc. (“TSS”

, the “Company”, “we”, “us” or “our”) provides comprehensive services for the planning, design, deployment, maintenance, refresh and take-back of end-user and enterprise systems, including the mission-critical facilities they are housed in. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation and facilities management. Our corporate offices are in Round Rock, Texas, and we also have an office in Dulles, Virginia.

The pre

paration of financial statements in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are

not

readily apparent from other sources. Actual results

may

differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable and that the actual results will

not

vary significantly from the estimated amounts.

The accompanying consolidated financial

statements have also been prepared on the basis that the Company will continue to operate as a going concern. Accordingly, assets and liabilities are recorded on the basis that the Company will be able to realize it assets and discharge its liabilities in the normal course of business. Our history of operating losses, negative working capital, and our stockholder’s deficiency cause substantial doubt about our ability to continue to operate our business as a going concern. We have reviewed our current and prospective sources of liquidity, significant conditions and events as well as our forecasted financial results and while we believe we have adequate plans to address these issues, there is still significant doubt about our ability to continue as a going concern. Our operating results have improved since the

second

half of

2016

and we generated net income in

2017,

improved our working capital position and reduced our stockholder’s deficiency. During

2016

we sold a portion of our facilities maintenance business in Maryland that was

not

geared towards the modular data center market for a purchase price of

$950,000,

and we made the decision to outsource multiple services including consulting engineering and project management that we had previously provided directly to our customers, allowing us to reduce our level of operating expenses.

During the

first

quarter of

2017,

we sold the remaining portion of our construction management business for

$350,000.

These actions, along with other cost reductions we made, provided additional capital for our business, lowered our total operating costs, improved our operating profits, and allowed us to focus our business activities on systems integration and modular data center build and maintenance activities. In

July 2017,

we modified and extended the term of our long-term debt and we also borrowed an additional

$650,000

in long-term debt, and in

October 2017

we borrowed another

$400,000

in long-term debt to help us improve our liquidity and manage our working capital. We believe that there are further adjustments that could be made to our business if we were required to do so.

Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs and our ability to secure additional sources of funding if needed. However, our revenue

may

not

meet our expectations, or our costs

may

exceed our estimates. Further, our estimates

may

change, and future events or developments

may

also affect our estimates. Any of these factors

may

change our expectation of cash usage in

2018

or significantly affect our level of liquidity, which

may

require us to seek additional financing or take other measures to reduce our operating costs or obtain funding to continue operating.

Any action to reduce operating costs

may

negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially impact our financial results depending on the level of cost reductions taken. These consolidated financial statements do

not

include any adjustments that might result from the Company

not

being able to continue as a going concern.

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Financial Instruments

The Company

’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair value of the long-term debt is disclosed in

Note

3–

Long Term Borrowings.

The carrying amounts of the other financial instruments approximate their fair value at

December 31, 2017

and

2016,

due to the short-term nature of these items. See

Note

– Fair Value Measurements.

Business Combinations Policy [Policy Text Block]

Accounting for Business Combinations

We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, is recorded as goodwill.

We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer contracts, leases and any other significant assets or liabilities and contingent consideration. Preliminary purchase price allocation is adjusted, as necessary, up to

one

year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

We recognize revenue when pervasive evidence of an arrangement exists, the contract price is fixed or determinable, services have been rendered or goods delivered, and collectability is reasonably assured. Our revenue is derived from

facility service and maintenance contracts, product shipments, time-and-materials contracts, fixed price contracts, and cost-plus-fee contracts (including guaranteed maximum price contracts).

Revenue from facility service and maintenance contracts are usually performed under master and other service agreements billed on a fixed fee basis.

These services agreements are recognized on the proportional performance method or ratably over the course of the service period and costs are recorded as incurred in performance.

We recognize revenue from

integration of assembled products when the finished product is shipped, and collection of the resulting receivable is reasonably assured. In arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.

Revenue and related costs for master and other service agreements billed on a time and materials basis are recognized as the services are rendered based on actual labor hours performed at contracted billable rates, and costs incurred on behalf of the customer.

Revenue from fixed price contracts is recognized on the percentage of completion method. We apply Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

605

35,

Construction-Type and Production-Type Contracts

, recognizing revenue on the percentage-of-completion method using costs incurred in relation to total estimated project costs. This method is used because management considers costs incurred and estimated costs to complete to be the best available measure of progress in the contracts. Contract costs include all direct materials, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, payroll taxes, employee benefits and supplies.

Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as earned in proportion to the allowable costs incurred in performance of the contract.

Billings in excess of costs and estimated earnings on uncompleted contracts are classified as current liabilities. Costs and estimated earnings in excess of billings, or work in process, are classified as current assets for the majority of our projects. Work in process on contracts is based on work performed but

not

yet billed to customers as per individual contract terms.

Certain of our contracts involve the delivery of multiple elements including design management, system installation and facilities maintenance. Revenues from contracts with multiple element arrangements are recognized as each element is earned based on the relative selling price of each element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the service when it is sold separately or competitor prices for similar services

Shipping and Handling Cost, Policy [Policy Text Block]

Shipping and Freight Costs

Costs to ship products to customers

, which consist primarily of freight expenses, are expensed as incurred and are included in

Cost of Revenue

. Total shipping and freight costs were approximately

$0.5

and

$0.2

million for the years ended

December 31, 2017

and

2016,

respectively.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. We

award shares of restricted stock and stock options to employees, managers, executive officers and directors.

During the years ended

December 31, 2017 and 2016,

we incurred approximately

and

$7,000,

respectively, in non-cash compensation expense which is included in

Cost of Revenue

and in

2017

and

2016

we incurred approximately

$0.1

and

$0.2

million, respectively, in non-cash compensation expense which was included in

Selling, general and administrative expenses.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentration of Credit Risk

We are currently economically dependent upon our relationship with a large US-based IT Original Equipment Manufacturer (OEM). If this relationship is unsuccessful or discontinues, our business and revenue

may

suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it could significantly reduce our revenue.

The following customers accounted for a significant percentage of our revenues for the periods shown:

	201 7		201 6
US-based IT OEM		67%		39%
US- based technology company		4%		12%
US-based data center company		0%		13%

other customers represented more than

10%

of our revenues for any periods presented. A US-based retail customer represented

25%

of our accounts receivable at

December 31, 2016.

Our US based IT OEM customer represented

26%

and

10%

of our accounts receivable at

December 31, 2017

and

2016,

respectively. A US-based UPS manufacturer represented

22%

and

15%

of our accounts receivable at

December

31,

2017

and

2016,

respectively. A US-based technology consulting company represented

23%

of our accounts receivable at

December 31, 2017.

A US-based technology company represented

17%

of our accounts receivable at

December 31, 2016.

other customer represented more than

10%

of our accounts receivable at

December 31, 2017

or at

December 31, 2016.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and cash equivalents

Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of

three

months or less, primarily consisting of bank time deposits

. At

December 31, 2017

and

2016

we did

not

have cash invested in interest bearing accounts. At

December 31, 2017,

we had unrestricted cash of

$1.95

million in excess of FDIC insured limits.

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Contract and Other Receivables

ccounts receivable are recorded at the invoiced amount and

may

bear interest in the event of late payment under certain contracts. Included in accounts receivable is retainage, which represents the amount of payment contractually withheld by customers until completion of a particular project.

Under certain construction management contracts, the Company is obligated to obtain performance bonds with various financial institutions, which typically require a security interest in the corresponding receivable.

December 31, 2017

and

2016,

bonds outstanding totaled

$7.3,

million and the sureties were indemnified in the event of a loss by related project receivables of

$0.02

million and

$0.02

million, respectively.

Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block]

Allowance for Doubtful Accounts

We estimate an allowance for doubtful accounts based on factors related to the specific credit risk of each customer. Historically our credit losses have been minimal. We perform credit evaluations of new customers and

may

require prepayments or use of bank instruments such as trade letters of credit to mitigate credit risk. As we expand our product offerings and customer base, our risk of credit loss

may

increase. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.

The following table summarizes the changes in our allowance for doubtful accounts (in

$’000

)

	Year Ended December 31,
	2017		2016
Balance at beginning of year	$	4	$	19
Additions charged to expense		2		5
Recovery of amounts previously reserved		2		(7	)
Amounts written off		-		(13	)
Balance at end of year	$	8	$	4

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the

first

-in,

first

-out method for all purchased inventory.

We write down obsolete inventory or inventory in excess of our estimated usage to its estimated market value less cost to sell, if less than its cost. Inherent in our estimates of market value in determining inventory valuation are estimates related to future demand and technological obsolescence of our products. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventories and our results of operations and financial position could be materially affected.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment are recorded at cost. We provide for depreciation using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. Depreciation expense is included in operating expenses in the statement of operations. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Goodwill and Intangible Assets

We have recorded goodwill and intangibles with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. These intangible assets are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is

not

amortized. The recorded goodwill is allocated to the reporting unit to which the underlying transaction relates.

GAAP requires us to perform an impairment test of goodwill on an annual basis or whenever events or circumstances make it more likely than

not

that impairment of goodwill

may

have occurred.

As part of the annual impairment test, we

first

have the option to make a qualitative assessment of goodwill for impairment. If we are able to determine through the qualitative assessment that the fair value of a reporting unit more likely than

not

exceeds its carrying value,

further evaluation is necessary. For those reporting units for which the qualitative assessment is either

not

performed or indicates that further testing

may

be necessary, we

may

then assess goodwill for impairment using a

two

-step process. The

first

step requires comparing the fair value of the reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the

second

step of the process is

not

required to be performed, and

impairment charge is required to be recorded. If that fair value does

not

exceed that carrying amount, we must perform the

second

step, which requires an allocation of the fair value of the reporting unit to all assets and liabilities of that unit as if the reporting unit had been acquired in a purchase business combination and the fair value of the reporting unit was the purchase price. The goodwill resulting from that purchase price allocation is then compared to the carrying amount with any excess recorded as an impairment charge.

We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount

may

not

be recoverable.

If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.

We have

elected to use

December 31

as our impairment date. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period, we will evaluate our indefinite lived intangible assets for impairment. The Company performed a quantitative analysis of our indefinite lived intangible assets at

December 31, 2017

and

2016

and concluded there was

impairment. Although there were events and circumstances in existence at both dates that suggest substantial doubt about our ability to continue as a going concern, the valuation results indicated that the fair value of our reporting units was greater than the carrying value, including goodwill, for each of our reporting units. Thus, we concluded that there was

impairment at

December 31, 2017

2016

for our goodwill and other long-lived intangible assets. At

December 31, 2017

and

2016,

the residual carrying value of goodwill was

$1.9

million.

Income Tax, Policy [Policy Text Block]

Income Taxes

Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company

’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A full valuation allowance has been recorded against our net deferred tax assets, because we have concluded that under relevant accounting standards it is more likely than

not

that deferred tax assets will

not

be realizable. We recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.

Earnings Per Share, Policy [Policy Text Block]

Earnings

(Loss) Per

Common Share

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of shares outstanding for the year. Diluted earnings (loss) per common share is computed similarly; however, it is adjusted for the effects of the assumed exercise of our outstanding stock options and the vesting of outstanding shares of restricted stock, if applicable.

Treasury Stock Policy [Policy Text Block]

Treasury Stock

account for treasury shares using the cost method. Purchases of shares of common stock are recorded at cost and results in a reduction of stockholders’ equity. We hold repurchased shares in treasury for general corporate purposes, including issuances under various employee compensation plans. When treasury shares are issued, we use a weighted average cost method. Purchase costs in excess of reissue price are treated as a reduction of retained earnings. Reissue price in excess of purchase costs is treated as additional paid-in-capital.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent

Accounting Guidance

Recently

Issued Accounting Pronouncements

May 2014,

the FASB issued Accounting Standards Update

2014

09,

Revenue from Contracts with Customers.

ASU

2014

supersedes the revenue recognition requirements of FASB ASC Topic

605,

Revenue Recognition

and most industry-specific guidance throughout the ASC, resulting in the creation of FASB ASC Topic

606,

Revenue from Contracts with Customers

. ASU

2014

requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of adoption. In

August 2015,

the FASB issued ASU

2015

14,

Revenue from Contracts with Customers, Deferral of the Effective Date

. ASU

2015

defers the effective date of ASU

2014

to annual reporting periods beginning after

December 15, 2017

and interim periods within those reporting periods beginning after that date, and permits early adoption of the standard, but

not

before the original effective date for fiscal years beginning after

December 15, 2016.

March 2016,

the FASB issued ASU

2016

08,

Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In

May 2016,

the FASB issued ASU

No.

2016

Revenue from Contracts with Customers (Topic

606

): Narrow-Scope Improvements and Practical Expedients

, which clarifies guidance in certain narrow areas and adds a practical expedient for certain aspects of the guidance. The amendments do

not

change the core principle of the guidance in ASU

2014

09.

July

2015,

the FASB issued ASU

2015

14,

which delayed the effective date of ASU

2014

09.

As a result, this guidance will be effective for annual reporting periods beginning after

December

15,

2017,

including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after

December

15,

2016,

including interim reporting periods within that reporting period. We will adopt the new standard in the

first

quarter of

2018

using the modified retrospective method, and do

not

expect this standard to have a material impact on our consolidated financial position and results of operations.

February 2016,

the FASB issued ASU

No.

2016

02,

“Leases (Topic

842

)”

. Under ASU

2016

02,

an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU

2016

offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU

2016

is effective for annual reporting periods beginning after

December 15, 2018,

including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are currently evaluating the future impact of ASU

2016

on our consolidated financial statements

May 2017,

the FASB issued ASU

No.

2017

09,

which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC

718.

Specifically, an entity would

not

apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU

2017

will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after

December 15, 2017.

Early adoption is

not

permitted. We do

not

expect this new guidance to have a material impact on our consolidation financial statements.