Note

Significant Accounting Policies

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 and integration facility are located in Round Rock, Texas.

The preparation 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.

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.

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, 2018

and

2017,

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

Note

– Fair Value Measurements.

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

January 1, 2018,

we adopted Accounting Standards Update

2014

, Revenue from Contracts with Customers

(ASU

2014

), using the modified retrospective method. Adoption of ASU

2014

did

not

have a material impact on our consolidated financial position or results of operations.

We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Maintenance services

We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. We recognize revenue from these services on a ratable basis over the contract term. Our contracts are typically

one

year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have

not

been provided. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment, however our history of non-payments and bad debt expense has been insignificant.

Integration

ervices

We generate integration services revenues from fees that provide our customers with customized system and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods. We typically extend credit terms to our integration customers based on their credit worthiness and generally do

not

receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within

105

days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ credit worthiness. As of

December 31 2018

and

2017,

our allowance for doubtful accounts was

$8,000.

Equipment

ales

We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods. Typically, we do

not

receive advance payments for equipment sales, however if we do, we record the advance payment as deferred revenue. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment sales are typically due within

days of invoicing.

Deployment and

Other services

We generate revenues from fees we charge our customers for other services, including repairs or other services

not

covered under maintenance contracts, installation and servicing of equipment including modular data centers that we sold, and other fixed-price services including repair, design and project management services. In some cases, we arrange for a

third

party to perform warranty and servicing of equipment, and in these instances, we recognize revenue as the amount of any fees or commissions that we expect to be entitled to. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional.

Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative standalone selling prices.

Judgments

We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.

Sales taxes

Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.

Shipping and handling costs

Costs for shipping and handling activities, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of sales and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has transferred to the customer.

The following table shows our revenues disaggregated by reportable segment and by product or service type (in

$’000

	Years ended December 31 ,
	2018		2017
FACILITIES:
Maintenance revenues	$	4,851	$	4,638
Equipment sales		2,860		2,608
Deployment and other services		7,475		5,008
	$	15,186	$	12,254

SYSTEMS INTEGRATION:
Integration services	$	7,149	$	6,062
TOTAL REVENUES	$	22,335	$	18,316

Remaining Performance Obligations

As part of our adoption of ASU

2014

09,

we have elected to use a practical expedient to exclude disclosure of transaction prices allocated to remaining performance obligations, and when we expect to recognize such revenue, for all periods prior to the date of initial application of the standard.

As of

December 31, 2018,

deferred revenue of

$2,181,000

represents our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within

one

year. The remaining

$112,000

of deferred revenue is our remaining performance obligations for other services, all of which is expected to be recognized between

one

and

three

years.

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, 2018

and

2017,

we incurred approximately

$0.2

and

$0.1

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

Selling, general and administrative expenses.

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

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

		201 8			201 7
US-based IT OEM		66%			67%

other customers represented more than

10%

of our revenues for any periods presented. Our US based IT OEM customer represented

75%

and

26%

of our trade accounts receivable at

December 31, 2018

and

2017,

respectively. A US-based UPS manufacturer represented

22%

of our accounts receivable at

December 31, 2017.

A US-based technology consulting company represented

23%

of our accounts receivable at

December 31, 2017.

other customer represented more than

10%

of our accounts receivable at

December 31, 2018

or at

December 31, 2017.

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, 2018

and

2017

we did

not

have cash invested in interest bearing accounts. At

December 31, 2018,

we had unrestricted cash of

$5.9

million in excess of FDIC insured limits.

Contract and Other Receivables

Accounts 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. At

December 31, 2018

and

2017,

bonds outstanding totaled

$7.3

million and

$7.3

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

$0.01

million and

$0.02

million, respectively.

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. 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,
	2018		2017
Balance at beginning of year	$	8	$	4
Additions charged to expense		-		4
Recovery of amounts previously reserved		-		-
Amounts written off		-		-
Balance at end of year	$	8	$	8

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 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

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, 2018

and

2017

and concluded there was

additional impairment. 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, 2018

2017

for our goodwill and other long-lived intangible assets. During the year ended

December 31, 2018

we wrote-off goodwill of

$1.1

million attributable to the sale of a subsidiary business (see Note

). At

December 31, 2018

and

2017,

the residual carrying value of goodwill was

$0.8

million and

$1.9

million, respectively.

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. The U.S. net operating losses generated prior to

2018

and

not

utilized can be carried forward for

years to offset future taxable income. 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

Common Share

Basic and diluted income per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purposes of determining diluted income per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

Treasury Stock

We 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.

Recent

Accounting Guidance

Recently Adopted Accounting Guidance

January 1, 2018,

we adopted

Accounting Standards Update

2014

09,

Revenue from Contracts with Customers

(ASU

2014

), using the modified retrospective method. 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. Adoption of ASU

2014

did

not

have a material impact on our consolidated financial position or results of operations.

January 1, 2018

we also adopted Accounting Standards Update

2016

08,

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

, (ASU

2016

), using the modified retrospective method. ASU

2016

clarified the implementation guidance on principal versus agent consideration from ASU

2014

09.

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. Adoption of ASU

2016

did

not

have a material impact on our consolidated financial position or results of operations.

Recently

Issued Accounting Pronouncements

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 and while we do

not

anticipate this having a material impact on our results of operations, we anticipate recording lease-related assets and liabilities of approximately

million on our consolidated balance sheet upon adoption of the pronouncement in

January 2019.

May 2017,

the FASB issued ASU

No.

2017

09,

which amends the scope of modification accounting for share-based payment arrangements. The AU 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.

Adoption of this new guidance did

not

have a material impact on our consolidated financial statements.