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, system installation, facilities management and IT reseller services. Our corporate offices and integration facility are located in Round Rock, Texas.

The preparation of the consolidated 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, 2019

and

2018,

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

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.

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.

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. Our contract terms 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 recognize revenue from these services on a ratable basis over the contract term. 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 creditworthiness 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’ creditworthiness. As of

December 31, 2019,

and

2018,

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.

Reseller services

We generate revenues from fees we charge our customers to procure

third

-party hardware, software and professional services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our reseller services revenue upon completion of the procurement activity. In some cases, we arrange for the purchase of

third

-party hardware, software or professional services that are resold directly to the original equipment manufacturer (OEM) and other customers, and in these instances, we act as an agent in the transaction and recognize revenue as the amount of any fee or commissions that we expect to be entitled to. Accounts receivable from our reseller activities are typically due within

days of invoicing.

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’s

	Years ended December 31 ,
	201 9		201 8
FACILITIES:
Maintenance revenues	$	4,148	$	4,851
Equipment sales		545		2,860
Deployment and other services		4,564		7,475
Total facilities revenues	$	9,257	$	15,186

SYSTEMS INTEGRATION:
Integration services	$	6,382	$	7,149
Reseller services		17,140		-
Total systems integration revenues		23,522		7,149
TOTAL REVENUES	$	32,779	$	22,335

Remaining Performance Obligations

Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have

not

yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of

one

year or less, we have elected the practical expedient applicable to such contracts and we do

not

disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of

December 31, 2019,

current deferred revenue of approximately

$2,104,000

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

one

year. The remaining approximately

$114,000

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, 2019

and

2018,

we incurred approximately

$0.4

and

$0.2

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 would significantly reduce our revenue.

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

		201 9				201 8
U.S.-based IT OEM			96%				66%

other customers represented more than

10%

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

96%

and

75%

of our trade accounts receivable at

December 31, 2019

and

2018,

respectively.

other customer represented more than

10%

of our accounts receivable at

December 31, 2019

or at

December 31, 2018.

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

we did

not

have cash invested in interest bearing accounts. At

December 31, 2019,

we had unrestricted cash of

$8.4

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.

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,
	2019		2018
Balance at beginning of year	$	8	$	8
Additions charged to expense		-		-
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 net realizable value. 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 net realizable 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 consolidated statements 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 annual assessment 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, 2019

and

2018

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, 2019

2018

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 business component (see Note

). At

December 31, 2019

and

2018,

the remaining carrying value of goodwill was

$0.8

million.

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 earnings 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 earnings 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, 2019,

we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, or ASC, Topic

842,

Leases

(“ASC

842”

), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASC

842

is intended to represent an improvement over previous GAAP, which did

not

require lease assets and lease liabilities to be recognized for most leases. We adopted ASC

842

using a modified retrospective approach for all leases existing at

January 1, 2019.

The adoption of ASC

842

had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. Accordingly, upon adoption, leases that were classified as operating leases under previous GAAP were classified as operating leases under ASC

842,

and we recorded an adjustment of

$1.96

million to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining lease payments, determined under prior GAAP, discounted using our secured incremental borrowing rate at the effective date of

January 1, 2019.

As permitted under ASC

842,

we elected several practical expedients that permit us

not

to reassess (

) whether a contract is or contains a lease, (

) the classification of existing leases, and (

) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did

not

have a significant impact on the measurement of the right-of-use assets or operating lease liabilities.

See Note

for further information on leases.

Recently

Issued Accounting Pronouncements

December 2019,

the FASB issued ASU

No.

2019

12,

Income Taxes (Topic

740

): Simplifying the Accounting

or Income Taxes.

The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod tax allocations and interim calculations and include additional guidance in order to reduce complexity in accounting for income taxes. ASU

2019

is effective for annual periods beginning after

December 15, 2020,

with early adoption permitted. This new guidance was adopted on

January 1, 2020

and the adoption of this ASU did

not

have a material impact on our consolidated financial statements.