Note 1 – Organization and Summary of Significant Accounting
Policies
Organization
TSS, Inc. (“TSS” or the “Company”),
through its wholly owned subsidiaries VTC, LLC d/b/a Total Site Solutions (“VTC”) and Innovative Power Systems, Inc.
(“Innovative”) provides comprehensive services for the planning, design, systems integration, development and maintenance
of mission-critical facilities and information infrastructure. The Company provides a single source solution for highly technical
mission-critical facilities such as data centers, operations centers, network facilities, server rooms, security operations centers,
communications facilities and the infrastructure systems that are critical to their function. The Company’s services consist
of technology consulting, design and engineering, construction management, facilities management and systems integration. The Company’s
corporate offices are in Columbia, MD and the Company operates a production facility and warehouse in Round Rock, TX.
Summary of Significant Accounting Policies
The preparation of financial statements in accordance with the
accounting principles generally accepted in the United States (“GAAP”) requires management 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, management evaluates its estimates which are based on historical experience and on various other
assumptions that management believes 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, management believes that its estimates are reasonable
and that the actual results will not vary significantly from the estimated amounts.
Revenue Recognition
The Company recognizes 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. The Company’s revenue is derived from fixed-price contracts, time and material contracts, cost-plus-fee
contracts (including guaranteed maximum price contracts), and facility service, maintenance contracts and product shipments. The
Company’s primary source of revenue is from fixed-price contracts and the Company applies 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.
Revenue from fixed-price contracts is recognized on the percentage
of completion method, measured by the percentage of total costs incurred to date to estimated total costs for each contract. This
method is used because management considers costs incurred and 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.
Contract revenue recognition inherently involves estimation.
The cost estimation process is based on the professional knowledge and experience of the Company’s engineers, project managers
and financial professionals. Examples of estimates include the contemplated level of effort to accomplish the tasks under the contract,
the costs of the effort, and an ongoing assessment of the Company’s progress toward completing the contract. From time to
time, as part of its standard management process, facts develop that require the Company to revise its estimated total costs on
revenue. To the extent that a revised estimate affects contract profit or revenue previously recognized, the Company records the
cumulative effect of the revision in the period in which the revisions becomes known. The full amount of an anticipated loss on
any type of contract is recognized in the period in which it becomes probable and can reasonably be estimated.
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.
The Company may incur costs at risk subject to an executed contract
document or change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Management
determines the probability that such costs will be recovered based upon evidence such as engineering studies, past practices with
the customer, specific discussions, correspondence or preliminary negotiations with the customer. The Company treats project costs
as a cost of contract performance in the period incurred if it is not probable that the costs will be recovered or in the event
of a dispute, or defers costs and/or recognizes revenue up to the amount of the related cost if it is probable that the contract
price will be adjusted and can be reliably estimated.
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 the Company’s 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.
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 Company’s customer. Services are also performed under master and other
service agreements billed on a fixed fee basis. Under fixed fee master service and similar type service agreements for facilities
and equipment, the Company furnishes various unspecified units of service for a fixed price. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Financial Instruments
The Company’s financial instruments primarily consist
of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and long-term debt. The fair value
of the long-term debt is disclosed in
Note 8 – Convertible Notes Payable and Note 9 – Credit Facility.
The carrying
amounts of the other financial instruments approximate their fair value at December 31, 2013 and 2012, due to the short-term nature
of these items. See
Note 12 – Fair Value Measurements.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable. See
Note 3 – Contracts and Other Receivables.
Accounting for Business Combinations
In accordance with the accounting standard for business combinations,
the Company allocates 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.
Management uses all available information to estimate fair values.
The Company typically engages 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.
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, 2013 and 2012 the Company did not have cash invested in interest bearing accounts. At December 31, 2013, the Company had unrestricted
cash of $3.3 million in excess of FDIC insured limits.
Restricted Cash
Restricted cash represents funds being held by a third party
for the purposes of funding future expenses related to a large contract that was signed in February 2013. At December 31, 2013,
the Company had restricted cash of $0.3 million in excess of FDIC insured limits.
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. The Company writes 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.
Fixed Assets
Fixed assets are recorded at cost. The Company provides 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.
Stock-Based Compensation
Stock-based compensation is measured at
the grant date based on the fair market value of the award and is recognized as expense ratably over the requisite service period,
net of estimated forfeitures. The Company awards shares of restricted stock and stock options to employees, managers, executive
officers and directors.
During the years ended December 31, 2013
and 2012, the Company incurred approximately $10,000 and $64,000, respectively in non-cash compensation expense which is included
in
Cost of Revenue
and $0.4 million in each year in non-cash compensation expense which was included in
Selling, general
and administrative expenses.
The Company’s stock-based employee compensation plans are described more fully in
Note
13 – Share Based Payments.
Advertising Costs
Advertising costs are expensed as incurred and are included
in
Selling, general and administrative expense
s. Total advertising costs were approximately $69,000 and $0.2 million for
the years ended December 31, 2013 and 2012, respectively.
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. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing
accounts receivable. The Company determines the allowance based on customer specific identification.
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, 2013 and 2012, bonds outstanding totaled $25.8 million and $18.5 million,
respectively, and the sureties were indemnified in the event of a loss by related project receivables of $19,283 and $0.8 million,
respectively.
Goodwill and Intangible Assets
The Company recorded goodwill and intangibles with definite
lives, including customer relationships and acquired software, in conjunction with the acquisition of the systems integration business.
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.
GAAP requires management 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, management first has the option to make a qualitative assessment of goodwill for impairment. If
management is able to determine through the qualitative assessment that the fair value of a reporting unit more likely than not
exceeds its carrying value, no 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, management 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 no impairment charge is required to be recorded. If that fair value does not exceed that carrying amount, management 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.
The Company also reviews 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.
The Company has elected to use December 31 as its impairment
date. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period,
the Company will evaluate its indefinite lived intangible assets for impairment. During the year ended December 31, 2012,
the Company performed a quantitative interim analysis that resulted in an impairment loss of $2.1 million. The Company performed
a qualitative analysis as of December 31, 2013 and 2012 and concluded there was no additional impairment. At December 31,
2013 and 2012, the residual carrying value of goodwill was $1.9 million and $1.8 million, respectively. See
Note 6 – Goodwill
and Intangible Assets
and
Note 12 – Fair Value Measurements.
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 million and $0 for the years ended December 31, 2013 and 2012, 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 not utilized can be carried forward for
20 years to offset future taxable income. A full valuation allowance has been recorded against the Company’s net deferred
tax assets, because the Company has concluded that under relevant accounting standards, it is more likely than not that deferred
tax assets will not be realizable. The Company recognizes interest and penalty expense associated with uncertain tax positions
as a component of income tax expense in the consolidated statements of operations.
Loss Per Common Share
Basic loss per common share is computed by dividing net loss
by the weighted-average number of shares outstanding for the year. Diluted loss per common share is computed similarly; however,
it is adjusted for the effects of the assumed exercise of the Company’s outstanding stock options and the vesting of outstanding
shares of restricted stock, if applicable. The weighted-average number of shares outstanding and the weighted-average number of
diluted shares outstanding are calculated in accordance with GAAP. See
Note 16 – Loss Per Share.
Treasury Stock
The Company accounts 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. The Company
holds repurchased shares in treasury for general corporate purposes, including issuances under various employee compensation plans.
When treasury shares are issued, the Company uses 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 Standards
In September 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standard Update 2011-08,
Intangibles-Goodwill and Other (Topic 350) Testing Goodwill
for Impairment
(“ASU 2011-08”)
.
ASU 2011-08 gives entities testing goodwill the option of performing a qualitative
assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. For those entities
that determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than
its carrying amount, an entity is not required to perform step 2 of the goodwill impairment test. ASU 2011-8 was effective for
the Company’s fiscal year ending December 31, 2012, and its adoption did not have an impact on the Company’s consolidated
financial statements.
In July 2012, the FASB issued guidance
to amend and simplify the rules relating to testing indefinite-lived intangible assets other than goodwill for impairment. The
revised guidance allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances,
to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. The revised guidance is
effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The
Company will adopt the guidance for the December 31, 2013 annual impairment testing and does not expect that adoption to have a
material impact on its consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11,
Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss,
or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)
. ASU 2013-11 is effective for the
Company starting the fiscal year and interim period beginning on January 1, 2014. The Company does not expect the adoption of ASU
2013-11 to have a material impact on its consolidated financial statements.
Note 2 – Acquisition
On May 20, 2013, VTC (the “Purchaser”)
entered into an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Purchaser agreed to acquire
certain assets and assume certain specified liabilities from arvato digital services LLC (the “Seller”) related to
the Seller’s data center integration business (the “Systems Integration business”) operated at its Round Rock,
Texas facility.
The preliminary purchase price paid by
the Purchaser under the Purchase Agreement was approximately $1.5 million, which included a negative purchase price adjustment
of $5,757 to reflect the value of the purchased inventory and certain vendor prepaid amounts. A payment of approximately $0.7 million
was paid in cash at closing, $0.4 million was set aside in an escrow account for the purposes of satisfying any indemnification
claims under the Purchase Agreement, and the balance of the purchase price of $0.4 million was paid on July 1, 2013. During the
year ended December 31, 2013, the Company incurred $0.3 million in acquisition costs associated with the purchase of the Systems
Integration business. These costs were included in
Selling, general and administrative expenses.
The purchased assets include all inventory, furniture, fixtures,
equipment, identified customer contracts, intellectual property (including certain proprietary software) and other assets used
in the Systems Integration business. The Company also offered employment to certain employees of the Systems Integration business
and assumed the Seller’s lease at the Round Rock, Texas facility for the remaining term.
The Purchaser and the Seller also entered into a Transition
Services Agreement and a Software License Agreement whereby the Purchaser will license purchased proprietary software back to the
Seller on a non-exclusive, perpetual, royalty-free basis, with certain territorial limitations.
The Company accounted for this transaction as a business combination
using the acquisition method in accordance with Accounting Standards Codification 805,
Business Combinations
(“ASC
805”). Under the acquisition method, the purchase price is allocated to underlying assets and liabilities based on their
estimated fair values at the date of acquisition. The purchase price allocation included goodwill and other intangible assets.
Recognition of goodwill is largely attributable to the assembled workforce acquired and other factors. Goodwill is recognized in
the Company’s only reportable segment as the acquisition did not result in the creation of a second reportable segment.
The following table summarizes the purchase price
allocation:
|
|
May 20,
|
|
|
|
2013
|
|
Cash paid at acquisition date
|
|
$
|
725,000
|
|
Additional installments of preliminary purchase price
|
|
|
744,243
|
|
Acquisition consideration
|
|
$
|
1,469,243
|
|
|
|
|
|
|
Inventories
|
|
$
|
132,307
|
|
Other current assets
|
|
|
10,976
|
|
Fixed assets
|
|
|
48,133
|
|
Goodwill
|
|
|
137,827
|
|
Intangible assets
|
|
|
1,140,000
|
|
Net assets acquired
|
|
$
|
1,469,243
|
|
The amount of revenue and net loss of the Systems Integration
business included in the Company’s statement of operations was $4.8 million and $0.6 million for the year ended December
31, 2013.
Intangible assets included approximately $0.9 million and $0.2
million attributable to a customer-related intangible asset and a technology-based asset, respectively. The intangible assets attributable
to the customer-related intangible asset are being amortized on a straight-line basis over ten years. The intangible assets attributable
to the technology-based asset are being amortized on a straight-line basis over five years. The customer-related intangible asset
represents the underlying relationships and agreements with the Seller’s existing customers. The technology-based asset represents
internally developed software.
Inventories, fixed assets and other assets were valued
at cost which approximates fair value. Intangibles were valued using Level 3 inputs, which result in management’s best
estimate of fair value from the perspective of a market participant.
The unaudited financial information in the table below
summarizes the combined results of continuing operations of the Company and the Systems Integration business, on pro forma
basis, as though the acquisition had occurred as of the first day of the twelve months ended December 31, 2012 and reflects
the effect of business acquisition accounting from the acquisition, including the amortization expense of acquired intangible
assets. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of
the results of operations that would have been achieved if the acquisition had taken place on that date or of results that
may occur in the future. The unaudited pro forma financial information for the years ended December 31, 2013 and
2012 combines the historical results for the Company and the historical results for the Systems Integration business for the
years ended December, 2013 and 2012.
|
|
Year Ended
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Revenue
|
|
$
|
58,334,960
|
|
|
$
|
61,488,004
|
|
Net loss from continuing operations
|
|
$
|
(1,914,431
|
)
|
|
$
|
(4,583,302
|
)
|
Basic loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.32
|
)
|
Diluted loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.32
|
)
|
Basic weighted average number of common shares outstanding
|
|
|
14,375,040
|
|
|
|
14,172,513
|
|
Diluted weighted average number of common shares outstanding
|
|
|
14,375,040
|
|
|
|
14,172,513
|
|
The pro forma net loss presented does not include non-recurring
acquisition costs of $0.3 million incurred during the year ended December 31, 2013.
Note 3 – Contract and Other Receivables
The Company performs services principally in the United States.
The Company’s sales to its three largest customers for the year ended December 31, 2013 represented 30%, 29% and 13% of total
revenues, respectively. For the year ended December 31, 2012, the major customers represented 30% and 15% of total revenues, respectively.
Contract receivables from these customers at December 31, 2013 and 2012 was $5.1 million and $3.7 million, respectively.
Retainage, which represents the amount of payment contractually
withheld by customers until completion of a particular project, represented $1.0 million and $0.2 million and was included in
Contract
and other receivables.
The Company performs ongoing evaluations of the credit worthiness
of its customers and maintains and allowance for potential doubtful accounts. Contracts and other receivables at December 31, 2013
and 2012 are stated net of allowances for doubtful accounts of approximately $24,000 and $44,000, respectively.
Note 4 – Inventories
Inventories at December 31, 2013 consisted of the following:
|
|
December 31,
2013
|
|
Work in process
|
|
$
|
46,162
|
|
Raw materials
|
|
|
176,013
|
|
Less: Reserve on raw materials
|
|
|
(5,499
|
)
|
Inventories, net
|
|
$
|
216,676
|
|
The Company values its inventories at cost with cost determined
on a first-in, first-out basis. Obsolete inventory or inventory in excess of its estimated usage is reserved to its estimated market
value less cost to sell, if less than its cost.
Note 5 – Fixed Assets
Property and equipment consisted of the
following:
|
|
Estimated Useful
|
|
December 31,
|
|
|
|
Lives
|
|
2013
|
|
|
2012
|
|
Vehicles
|
|
5 years
|
|
$
|
31,874
|
|
|
$
|
80,842
|
|
Trade equipment
|
|
5 years
|
|
|
208,068
|
|
|
|
171,223
|
|
Leasehold improvements
|
|
2 – 5 years
|
|
|
196,126
|
|
|
|
633,865
|
|
Furniture and fixtures
|
|
7 years
|
|
|
68,219
|
|
|
|
62,776
|
|
Computer equipment and software
|
|
3 years
|
|
|
921,124
|
|
|
|
692,565
|
|
|
|
|
|
|
1,425,411
|
|
|
|
1,641,271
|
|
Less accumulated depreciation
|
|
|
|
|
(988,779
|
)
|
|
|
(1,367,820
|
)
|
Property and equipment, net
|
|
|
|
$
|
436,632
|
|
|
$
|
273,451
|
|
Depreciation of fixed assets and amortization of leasehold improvements
and software totaled $0.2 million and $0.3 million for the years ended December 31, 2013 and 2012, respectively.
Note 6 – Goodwill and Intangible Assets
GAAP specifies criteria that intangible assets acquired in a
purchase method business combination must meet in order to be recognized and reported apart from goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for impartment at least on an annual basis. During the
second quarter of 2012, the Company determined based on the overall decline of market capitalization value of the Company, an indicator
of impairment was present and based upon tests performed recorded an impairment charge of $2.1 million.
The Company recorded approximately $0.1 million of goodwill
related to the acquisition of the Systems Integration business. In connection with that acquisition, the Company recorded approximately
$1.1 million of identifiable intangible assets. As of December 31, 2013, $0.9 million represents customer relationships and $0.2
million represents acquired software.
The following tables highlight the Company’s intangible
assets and accumulated amortization as of December 31, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,906,688
|
|
|
|
-
|
|
|
$
|
1,768,861
|
|
|
|
-
|
|
Tradename
|
|
$
|
60,000
|
|
|
|
-
|
|
|
$
|
60,000
|
|
|
|
-
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
906,000
|
|
|
$
|
(55,285
|
)
|
|
|
-
|
|
|
|
-
|
|
Acquired software
|
|
$
|
234,000
|
|
|
$
|
(28,558
|
)
|
|
|
-
|
|
|
|
-
|
|
The Company recognized amortization expense related to intangibles
of approximately $84,000 and $0 for the years ended December 31, 2013 and 2012, respectively.
Annual amortization expense for the acquired software during
each year through 2017 will be approximately $47,000 and will be approximately $18,000 in 2018. Amortization expense for the customer-related
intangible asset is expected to be approximately $91,000 during each year through 2022 and approximately $35,000 in 2023.
Note 7 – Accounts Payable and Accrued Expenses
The Company’s accounts payable and accrued expenses at
December 31, 2013 and 2012 consisted of the following:
|
|
2013
|
|
|
2012
|
|
Accounts payable
|
|
$
|
5,015,964
|
|
|
$
|
2,022,893
|
|
Accounts payable retainage
|
|
|
272,450
|
|
|
|
462,983
|
|
Accrued expenses
|
|
|
1,636,301
|
|
|
|
2,332,572
|
|
Compensation, benefits and related taxes
|
|
|
627,532
|
|
|
|
649,202
|
|
Restructuring liability
|
|
|
-
|
|
|
|
54,141
|
|
Other accrued expenses
|
|
|
37,275
|
|
|
|
231,556
|
|
Total accounts payable and accrued expenses
|
|
$
|
7,589,522
|
|
|
$
|
5,753,347
|
|
In an effort to align the Company’s resources with anticipated
types of services and volume, during the year ended December 31, 2012 the Company adopted a restructuring plan that included a
reduction in employee work force by 18 employees. The restructuring plan resulted in a restructuring charge in the amount of $0.3
million, which was principally related to stock based compensation, estimated employee severance and post-employment health care
costs to be paid by the Company in connection with implementing the restructuring plan. During the years ended December 31, 2013
and 2012, the Company made cash payments related to the employee severance totaling $0.1 million and $0.2 million, respectively.
Note 8 – Convertible notes payable
On May 21, 2013, the Company and Gerard J. Gallagher, the Chief
Technical Officer of the Company, agreed to restructure the promissory note held by Mr. Gallagher. As part of this restructuring,
Mr. Gallagher agreed to reduce the outstanding principal amount by $0.3 million, which is reflected as a non-cash item in the accompanying
audited condensed consolidated statements of cash flows. After the reduction, the new principal amount due was $1.9 million, which
bears interest at an annual rate of 4%. This reduction in the principal amount was agreed upon in exchange for an immediate payment
of $900,000 at the time of closing, leaving an outstanding principal balance of $1.0 million. In addition, the Amended and Restated
Convertible Promissory Note provides for eight quarterly principal payments of $25,000 beginning July 1, 2013, a principal payment
of $100,000 on January 3, 2014, and the remaining outstanding balance due on July 1, 2015. The promissory note remains convertible
into shares of the Company’s common stock at a conversion price of $7.50 per share. All amounts due under the note are immediately
due and payable upon the occurrence of a “change in control” of the Company (as defined in the promissory note) or
the death of Mr. Gallagher. If the Company fails to pay any amount due under the promissory note within five days after the date
due, the Company must pay Mr. Gallagher a late charge equal to 5% of the amount due and unpaid. The Company’s obligations
under the promissory note held by Mr. Gallagher are subordinated to the obligations under a credit facility with Bridge Bank, National
Association (see
Note 9 – Credit Facility).
Upon an “event of default” (as defined in the promissory
note) and during the continuance of the event of default, the outstanding principal indebtedness under the promissory note will
bear interest at an annual rate of 7%. If the Company fails to cure an event of default within a period of 60 days following the
date of such event of default, Mr. Gallagher will have the right to convert any amount equal to not less than $25,000 but up to
an amount equal to the unpaid amount due under the promissory note into that number of shares of the Company’s common stock
obtained by dividing the amount being converted by a conversion price equal to 125% of the fair market value per share of the Company’s
common stock. For purposes of the promissory note, the fair market value of a share of the Company’s common stock equals
the average of the high and low bid prices of the Company’s common stock reported daily on the OTCQB marketplace during the
twenty day period ending on the date Mr. Gallagher elects to make such conversion. Notwithstanding these conversion rights, the
aggregate number of shares of the Company’s common stock that may be issued as a result of converting amounts due under the
promissory note upon an event of default may not exceed 12% of the issued and outstanding shares of the Company’s common
stock as of the date Mr. Gallagher initially elects to make such conversion.
The Company incurred approximately $40,000 related to the restructuring
of the note. These costs are included in other assets and are being amortized over the life of the note on a straight-lined basis.
Approximately $12,000 was recorded as amortization expense for the year ended December 31, 2013.
The restructured note was recorded at fair market value resulting
in a discount of $0.1 million. The discount is being amortized over the period from the date of issuance to the date the note is
due using the effective interest method.
The balance of the notes payable at December 31, 2013 and 2012
were as follows:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Convertible, unsecured promissory note, due 2015 (4.0%), net
|
|
$
|
859,843
|
|
|
$
|
2,457,301
|
|
Less: current portion, net
|
|
|
137,000
|
|
|
|
500,000
|
|
Convertible notes payable, long-term, net
|
|
$
|
722,843
|
|
|
$
|
1,957,301
|
|
The unamortized discount at December 31, 2013 and 2012 was $90,157
and $0, respectively. As of December 31, 2013, $63,000 was recorded as a contra account to convertible notes payable-current, and
$27,157 was recorded as a contra account to convertible notes payable, long-term.
Scheduled principal repayments on the convertible, unsecured
promissory note at December 31, 2013 are as follows:
2014
|
|
|
200,000
|
|
2015
|
|
|
750,000
|
|
Total
|
|
$
|
950,000
|
|
Note 9 – Credit Facility
On November 8, 2011, the Company and its subsidiaries Innovative
Power Systems, Inc., VTC, L.L.C., Total Site Solutions Arizona, LLC, and Alletag Builders, Inc. (together with the Company, collectively,
“2011 Borrowers”) obtained a credit facility (the “2011 Credit Facility”) from Wells Fargo Bank, National
Association (“WF, NA”) pursuant to a Credit Agreement by and among 2011 Borrowers and WF, NA (the “Credit Agreement”).
During the three months ended March 31, 2012, however, the Company failed to comply with the financial covenants requiring (a)
a maximum ratio of total liabilities to tangible net worth as set forth in the Credit Agreement; and (b) a minimum debt service
coverage ratio as set forth in the Credit Agreement. The 2011 Credit Facility was terminated effective June 28, 2012.
On May 21, 2013, the Company and its subsidiaries Innovative
Power Systems, Inc., VTC L.L.C., Total Site Solutions Arizona, LLC, and Alletag Builders, Inc. (together with the Company, collectively,
“2013 Borrowers”), obtained a revolving credit facility (the “2013 Credit Facility”) from Bridge Bank,
National Association (“Lender”) pursuant to a Business Financing Agreement by and among Borrowers and Lender (the “Financing
Agreement”). The 2013 Borrowers’ obligations under the 2013 Credit Facility are joint and several. The obligations
under the 2013 Credit Facility are secured by substantially all of the 2013 Borrowers’ assets. The maximum amount of the
2013 Credit Facility is $6.0 million. The 2013 Credit Facility is subject to a borrowing base of 80% of eligible accounts receivable,
subject to customary exclusions and limitations. Borrowings under the 2013 Credit Facility will bear interest at (1) the greater
of (a) the prime rate published by the Lender, which was 3.25% at September 30, 2013 or (b) 3.25%, plus (2) 2.0% per annum. In
addition to interest payable on the principal amount of indebtedness outstanding from time to time under the 2013 Credit Facility,
the 2013 Borrowers (a) paid a commitment fee of $30,000 to Lender and (b) are required to pay to Lender an annual fee of $30,000.
The 2013 Credit Facility matures on May 21, 2015. In the event the Financing Agreement is terminated prior to May 21, 2014, the
2013 Borrowers will be required to pay a termination fee equal to $60,000 to Lender; provided that Lender will waive payment of
the termination fee if the 2013 Credit Facility is transferred to or refinanced by another facility or division of Lender unless
such transfer or refinance is the result of an event of default under the 2013 Credit Facility.
The 2013 Credit Facility requires that the 2013 Borrowers maintain
an asset coverage ratio of at least 1.5 to 1.0. The asset coverage ratio is determined by dividing the Borrowers’ unrestricted
cash on deposit with Lender plus eligible accounts receivable by the 2013 Borrower’s obligations outstanding under the 2013
Credit Facility. On December 31, 2013, the Company had an asset coverage ratio of 2.85 to 1.0.
At December 31, 2013, there was $3.0 million in borrowings outstanding
under the 2013 Credit Facility. This amount represented the highest amount of borrowings during the year ended December 30, 2013.
Additional borrowing availability was approximately $1.0 million at December 31, 2013.
The Company incurred expenses of $0.2 million, including a commitment
fee of $30,000, related to obtaining the 2013 Credit Facility. These costs are included in other assets and are being amortized
over the life of the 2013 Credit Facility on a straight line basis. Approximately $47,000 was recorded as amortization expense
for the year ended December 31, 2013.
Note 10 – Income Taxes
Income taxes are recognized for the amount of taxes payable
or refundable for the current year and deferred tax liabilities and assets are established for the future tax consequences of events
that have been recognized in our consolidated financial statements or tax returns. The effects of income taxes are measured based
on enacted tax laws and rates.
The provision/(benefit) for income taxes
from continuing operations consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(934,708
|
)
|
|
|
(862,244
|
)
|
State
|
|
|
(330,558
|
)
|
|
|
(246,116
|
)
|
Total benefit for income taxes before valuation allowance
|
|
$
|
(1,265,266
|
)
|
|
$
|
(1,108,360
|
)
|
Change in valuation allowance
|
|
|
1,265,266
|
|
|
|
1,108,360
|
|
Total provision (benefit) for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The significant components of the Company’s
deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Gross current deferred taxes:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
35,091
|
|
|
$
|
151,614
|
|
Gross current deferred tax assets before valuation allowance
|
|
|
35,091
|
|
|
|
151,614
|
|
Valuation allowance
|
|
|
(13,742
|
)
|
|
|
(140,880
|
)
|
Gross current deferred tax assets
|
|
$
|
21,349
|
|
|
$
|
10,734
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
(21,349
|
)
|
|
$
|
(10,734
|
)
|
Deferred current tax liabilities
|
|
|
(21,349
|
)
|
|
|
(10,734
|
)
|
Net current deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-current deferred taxes:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
10,807,586
|
|
|
$
|
9,052,085
|
|
Goodwill and other intangibles
|
|
|
5,394,546
|
|
|
|
5,946,667
|
|
Deferred compensation
|
|
|
366,208
|
|
|
|
232,424
|
|
Depreciation
|
|
|
211,800
|
|
|
|
156,497
|
|
Other carryovers and credits
|
|
|
21,095
|
|
|
|
21,157
|
|
Gross non-current deferred tax assets before valuation allowance
|
|
|
16,801,235
|
|
|
|
15,408,830
|
|
Valuation allowance
|
|
|
(16,801,235
|
)
|
|
|
(15,408,830
|
)
|
Gross non-current deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of goodwill and other
|
|
|
-
|
|
|
|
-
|
|
Deferred non-current tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Net non-current deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2013 and 2012, the Company had net operating
losses (“NOL”) totaling $26.7 million and $22.8 million, respectively, to be carried forward 20 years to offset future
taxable income and any unused NOL will begin to expire in 2027. At December 31, 2013 and 2012, the Company has recorded a deferred
tax asset and corresponding valuation allowance of $10.8 million and $9.1 million, respectively, reflecting the federal and state
benefit of the remaining loss carryforwards.
The Company does not believe its net operating loss will be
limited under Internal Revenue Code (“IRC”) Section 382 and believes it will also be available for state income tax
purposes subject to state carryforward limitations. IRC Section 382 limits the utilization of net operating loss in
years subsequent to an owner shift based upon the value of the Company at the date of the owner shift. The Company has
not undertaken a detailed study in connection with IRC Section 382 in order to determine if there is any limitation of the utilization
of its net operating loss carryforward. If IRC Section 382 limitation were deemed to apply, the Company’s gross
deferred tax asset and its corresponding valuation allowance could be reduced.
The Company’s provision for income taxes reflects the
establishment of a full valuation allowance against deferred tax assets as of December 31, 2013 and 2012. Accounting Standards
Codification Topic 740
Income Taxes
requires management to evaluate its deferred tax assets on a regular basis to reduce
them to an amount that is realizable on a more likely than not basis.
At December 31, 2013 and 2012, the Company has established a
full valuation allowance with respect to these federal and state loss carryforwards and other net deferred tax assets due to uncertainties
surrounding their realization. The Company has concluded that, under relevant accounting standards, it is more likely than not
that the deferred tax assets will not be realizable based on its historical operating results and estimated future taxable income.
The Company believes that it is more likely than not that the benefit of the net deferred tax assets will not be fully realized
based on the Company’s current year loss and estimated future taxable income.
In determining the Company’s provision/(benefit) for income
taxes, net deferred tax assets, liabilities and valuation allowances, management is required to make judgments and estimates related
to projections of profitability, the timing and extent of the utilization of net operating loss carryforwards and applicable tax
rates. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain; therefore,
actual results could differ materially from the projections.
The Company adopted the provisions of the guidance related to
accounting for uncertainties in income taxes. The Company has analyzed its current tax reporting compliance positions for all open
years, and has determined that it does not have any material unrecognized tax benefits. Accordingly, the Company has omitted the
tabular reconciliation schedule of unrecognized tax benefits. The Company does not expect a material change in unrecognized tax
benefits over the next 12 months. All of the Company’s prior federal and state tax filings from the 2010 tax year forward
remain open under statutes of limitation. Innovative Power System Inc.’s statutes of limitation are open from the 2010
tax year forward for both federal and Virginia purposes. Quality Power Systems Inc.’s statutes of limitation are open
from the 2010 tax year forward for both federal and Virginia purposes. SMLB’s statutes of limitation are open from the
2010 tax year for both federal and Illinois purposes.
The total provision for income taxes differs from that amount
which would be computed by applying the U.S. federal income tax rate to income before provision for income taxes due to the following:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State tax, net of income tax benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Effect of permanent differences
|
|
|
6.0
|
%
|
|
|
18.0
|
%
|
Effect of valuation allowance
|
|
|
(40.0
|
)%
|
|
|
(52.0
|
)%
|
Total
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Note 11 – Commitments and Contingencies
The Company leases premises and equipment under operating leases
having terms from month-to-month to 4 years. At December 31, 2013, future minimum lease payments under leases having an initial
or remaining non-cancellable lease term in excess of one year are as set forth in this table below:
Year
|
|
|
|
2014
|
|
$
|
800,196
|
|
2015
|
|
|
749,639
|
|
2016
|
|
|
625,321
|
|
2017
|
|
|
75,264
|
|
2018
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
2,250,420
|
|
For the years ended December 31, 2013 and 2012, rent expense
included in selling, general and administrative expenses for operating leases was $0.5 million and $0.5 million, respectively.
For the years ended December 31, 2013 and 2012, rent expense included in cost of revenue for operating leases was $0.3 million
and $0, respectively.
The Company, in the normal course of business, issues binding
purchase orders to subcontractors and equipment suppliers. At December 31, 2013, these open purchase order commitments amount to
approximately $5.6 million. The majority of services delivered and equipment received is expected to be satisfied during the first
six months of 2014 at which time these commitments will be fulfilled.
From time to time, the Company is involved in various legal
matters and proceedings concerning matters arising in the ordinary course of business. The Company currently estimates that a material
adverse effect on its financial position, results of operations and cash flows from such matters is not reasonably possible.
During the year ended December 31, 2012, the Company settled
with a third party a dispute that was not related to an existing customer contract or ongoing customer relationship, resulting
in an amount owed of $0.2 million. As the settlement was unrelated to an existing customer contract or ongoing customer relationship,
it was included as other expense, net. The parties reached a mutual settlement that included general releases through the date
of the agreement.
Note 12 – Fair Value Measurements
GAAP defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. GAAP also established a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. As of December 31, 2013, the Company did not have any assets measured at fair value on a recurring basis that would
require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities
are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities
initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial,
long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities including
goodwill and property and equipment are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective
of a market participant, when there is an indication of impairment and are recorded at fair
value only when impairment is recognized.
The Company recorded an impairment charge of $2.1 million in
connection with the goodwill during 2012. See
Note 6 – Goodwill and Intangible Assets
.
Note 13 – Share Based Payments
On January 17, 2007, the stockholders of the Company approved
the Company’s 2006 Omnibus Incentive Compensation Plan (the “Plan”), which was designed to attract, retain and
motivate key employees. Under the Plan, the Company reserved 2.1 million shares of the Company’s common stock for issuance
to employees and directors through incentive stock options, non-qualified stock options or restricted stock. Increases to
shares available under the plan require shareholder approval. On June 6, 2012 and June 4, 2010, the stockholders approved an increase
to the shares available for award under the Plan of 2.0 million and 1.0 million, respectively. Through December 31, 2013, the aggregate
number of shares available for issuance under the Plan was 5.1 million of which 0.6 million shares remain available for issuance.
The Plan is administered by the compensation committee of our
Board of Directors. Subject to the express provisions of the Plan, the committee has the Board of Directors' authority to administer
and interpret the Plan, including the discretion to determine the form of grant, exercise price, vesting schedule, contractual
life and the number of shares to be issued. The Company had historically issued restricted stock; however, as further incentive
to key employees, the Company also issued options to purchase shares of our common stock during the years ended December 31, 2013
and 2012.
Stock-based Compensation Expense
For the year ended December 31, 2012, the Company recognized
stock-based compensation of $0.4 million, of which approximately $10,000 was included in
Cost of Revenue
. For
the year ended December 31, 2012, the Company recognized stock-based compensation of $0.5 million of which approximately $64,000
was included in
Cost of Revenue
.
As of December 31, 2013, the total unrecognized compensation
cost related to unvested restricted stock and options to purchase common stock was approximately $0.7 million with a weighted average
remaining vest life of 1.7 years.
Stock Options
Although the Company had historically issued
restricted stock, the Company issued options to purchase shares of the Company’s common stock during the years ended December
31, 2013 and 2012. The grants have various vesting features including time based vesting and performance based vesting.
Fair Value Determination
-The Company utilizes a Black-Scholes-Merton model to value stock options vesting over time, while market exercisable awards were
valued using a Monte Carlo simulation. The Company will reconsider the use of the Black-Scholes-Merton model and Monte-Carlo simulation
if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued
in future periods have characteristics that cannot be reasonably estimated under these models.
Volatility
-The
expected volatility of the options granted was estimated based upon historical volatility of the Company’s share price through
weekly observations of the Company’s trading history corresponding to the expected term for Black-Scholes-Merton model and
longest available history, or 6.69 years, for the Monte Carlo simulation.
Expected Term
-Given the lack of historical experience, the expected term of options granted to employees was determined utilizing a plain vanilla
approach whereby minimum or median time to vest and the contractual term of 10 years are averaged.
Risk-free Interest Rate
-The yield was determined based on U.S. Treasury rates corresponding to the expected term of the underlying grants.
Dividend Yield
-The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. The Company does not anticipate paying
dividends; therefore the yield was estimated at zero.
The following table summarizes weighted-average
assumptions used in our calculations of fair value for the year ended December 31, 2013:
|
|
Black-Scholes-Merton
|
|
|
Monte Carlo Simulation
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
105.70
|
%
|
|
|
87.01
|
%
|
Expected life of options (in years)
|
|
|
6.03
|
|
|
|
2.00
|
|
Risk-free interest rate
|
|
|
1.22
|
%
|
|
|
0.26
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock Option Activity
- During
the years ended December 31, 2013 and 2012, the Company granted stock options to purchase 0.9 million and 2.1 million shares, respectively,
of common stock at a weighted-average exercise price of $0.66 and $0.45 per share, respectively, which reflects the fair market
value of the shares on date of grant. In accordance with the terms of the Plan, the Board of Directors determined that the average
of the high and low bid prices for the Common Stock reported daily on the OTCQB marketplace during the 20 trading days following
the grant date was the fair market value of the shares. The weighted-average fair value of options granted during the years ended
December 31, 2013 and 2012, as determined under the Black-Scholes-Merton valuation model and Monte-Carlo simulation was $0.53 and
$0.37, respectively.
The following table includes information with respect to stock
option activity and stock options outstanding for the years ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life (years)
|
|
|
Value*
|
|
Shares under option, January 1, 2012
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
2,100,000
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Options cancelled and expired
|
|
|
(150,000
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2012
|
|
|
1,950,000
|
|
|
$
|
0.45
|
|
|
|
9.44
|
|
|
$
|
64,400
|
|
Options granted
|
|
|
934,000
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Options cancelled and expired
|
|
|
(519,000
|
)
|
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2013
|
|
|
2,365,000
|
|
|
$
|
0.52
|
|
|
|
8.75
|
|
|
$
|
9,600
|
|
*Aggregate intrinsic value includes
only those options with intrinsic value (options where the exercise price is below the market
price).
The following table summarizes non-vested stock options for
the years ended December 31, 2013 and 2012:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested stock options at January 1, 2012
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
2,100,000
|
|
|
$
|
0.37
|
|
Vested during period
|
|
|
-
|
|
|
$
|
-
|
|
Options cancelled
|
|
|
(150,000
|
)
|
|
$
|
(0.37
|
)
|
Non-vested shares under option, December 31, 2012
|
|
|
1,950,000
|
|
|
$
|
0.37
|
|
Options granted
|
|
|
934,000
|
|
|
$
|
0.53
|
|
Vested during period
|
|
|
(126,667
|
)
|
|
$
|
(0.32
|
)
|
Options cancelled
|
|
|
(519,000
|
)
|
|
$
|
(0.42
|
)
|
Non-vested shares under option, December 31, 2013
|
|
|
2,238,333
|
|
|
$
|
0.43
|
|
The following table includes information
concerning stock options exercisable and stock options expected to vest at December 31, 2013:
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Life (years)
|
|
|
Price
|
|
|
Value
|
|
Stock options exercisable
|
|
|
126,667
|
|
|
|
8.54
|
|
|
$
|
0.44
|
|
|
$
|
3,200
|
|
Stock options expected to vest
|
|
|
2,238,333
|
|
|
|
8.73
|
|
|
$
|
0.52
|
|
|
$
|
6,400
|
|
Options exercisable and expected to vest
|
|
|
2,365,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
The Company has granted shares of restricted stock under the
Plan. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period
lapses. Restricted shares issued to employees typically vest over three years in one-third increments on the first, second and
third anniversaries of the grant date, contingent upon employment with the Company on the vesting dates. The related compensation
expense is recognized over the service period and is based on the grant date fair value of the stock and the number of shares expected
to vest.
The fair value of restricted stock awarded for the years ended
December 31, 2013 and 2012 totaled $27,500 and $0.2 million, respectively, and were calculated using the value of TSS’ common
stock on the grant date. The value of awards are being amortized over the vesting periods of the awards taking into account the
effect of an estimated forfeiture rate of zero associated with termination behavior for the years ended December 31, 2013 and 2012,
respectively.
Restricted Stock Activity
-The
following table summarizes the restricted stock activity during the years ended December 31, 2013 and 2012:
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested January 1, 2012
|
|
|
370,000
|
|
|
$
|
1.55
|
|
Granted restricted stock
|
|
|
255,000
|
|
|
$
|
0.94
|
|
Vested restricted stock
|
|
|
(338,164
|
)
|
|
$
|
(1.51
|
)
|
Forfeitures
|
|
|
(16,667
|
)
|
|
$
|
(1.50
|
)
|
Unvested December 31, 2012
|
|
|
270,169
|
|
|
$
|
1.03
|
|
Granted restricted stock
|
|
|
36,667
|
|
|
$
|
0.75
|
|
Vested restricted stock
|
|
|
(121,836
|
)
|
|
$
|
(0.83
|
)
|
Unvested December 31, 2013
|
|
|
185,000
|
|
|
$
|
0.95
|
|
Note 14 – Common Stock Repurchases
During the year ended December 31, 2013, the Company repurchased
14,435 treasury shares with an aggregate value of approximately $8,000 associated with the vesting of restricted stock held by
employees. During the year ended December 31, 2012, the Company repurchased 87,805 treasury shares with an aggregate value of $0.1
million associated with the vesting of restricted stock held by an employee. Per terms of the restricted stock agreements, the
Company, for certain employees, paid the employee’s related taxes associated with the employee’s vested stock and decreased
the freely tradable shares issued to the employee by a corresponding value, resulting in a share issuance net of taxes to the employee.
The value of the shares netted for employee taxes represents treasury stock repurchased.
Note 15 – Related Party Transactions
The Company participates in transactions with the following
entities affiliated through common ownership and management. The Audit Committee in accordance with its written charter reviews
and approves in advance all related party transactions greater than $25,000 and follows a pre-approved process for contracts with
a related party for less than $25,000.
Chesapeake Mission Critical, L.L.C.
(“Chesapeake
MC”) is 10.32% owned by Thomas P. Rosato, the Company’s former Chief Executive Officer, a former member of the Board
of Directors and the holder of approximately 10.0% of the Company’s outstanding common stock at December 31, 2013. Chesapeake
MC is a manufacturers’ representative reselling and servicing mechanical and electrical equipment from original equipment
manufacturers.
TPR Group Re Three, LLC
(“TPR
Group Re Three”) is 50% owned by Mr. Rosato and Gerard G. Gallagher, the Company’s Chief Technical Officer and a member
of the Board of Directors. TPR Group Re Three leases office space to the Company under the terms of a real property lease. The
original lease term expired at December 31, 2011. Prior to expiration, the lease was renegotiated to a full service lease, excluding
utilities, at $24 per square foot or an aggregate annual rate of $0.3 million, representing an annual reduction of approximately
$0.2 million. In May 2013, the lease was amended for a new term beginning August 1, 2013 and terminating July 31, 2016.
RF Realty Investments, LLC
(“RF Realty”)
is owned by Mr. Rosato and his family. RF Realty leases office and warehouse space to the Company. The Company obtained an independent
appraisal of the lease, which determined the lease to be at fair value. In May 2013 the lease of the office space was cancelled
effective July 31, 2013.
The following table sets forth transactions the Company has
entered into with the above related parties for the year ended December 31, 2013 and 2012. Cost of revenue represents costs
incurred in connection with related parties providing services to us on contracts for our customers. Accordingly, a direct relationship
to the revenue and cost of revenue information below by the Company should not be expected.
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cost of Revenue
|
|
|
|
|
|
|
Chesapeake Mission Critical, LLC
|
|
|
-
|
|
|
$
|
116,017
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
Office rent paid to RF Realty Investments, LLC, assigned by Chesapeake Tower Systems, Inc.
|
|
$
|
128,042
|
|
|
$
|
151,992
|
|
Office rent paid to TPR Group Re Three, LLC
|
|
|
277,316
|
|
|
|
278,657
|
|
Total Selling, general and administrative
|
|
$
|
405,358
|
|
|
$
|
430,649
|
|
Note 16 – Loss Per Share
Basic and diluted (loss) 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 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.
The following table presents a reconciliation of the numerators
and denominators of the basic and diluted earnings per share computations for income from continuing operations. In the table below,
income represents the numerator and shares represent the denominator:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Loss
|
|
|
Shares
|
|
|
$ per
Share
|
|
|
Income
|
|
|
Shares
|
|
|
$ per
Share
|
|
|
|
|
|
Basic Loss per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,794,405
|
)
|
|
|
14,375,040
|
|
|
$
|
(0.19
|
)
|
|
$
|
(3,960,331
|
)
|
|
|
14,172,513
|
|
|
$
|
(0.28
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unsecured convertible note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Loss per Share
|
|
$
|
(2,794,405
|
)
|
|
|
14,375,040
|
|
|
$
|
(0.19
|
)
|
|
$
|
(3,960,331
|
)
|
|
|
14,172,513
|
|
|
$
|
(0.28
|
)
|
For the years ended December 31, 2013 and 2012, potentially
dilutive shares of 2,676,667 and 2,547,809 were excluded from the calculation of dilutive shares because their effect would have
been anti-dilutive due to the net loss.
Note 17 – Subsequent Events
In connection with the preparation of its financial statements
for the year ended December 31, 2013, the Company has evaluated events that occurred subsequent to December 31, 2013 through the
date of issuance to determine whether any of these events required recognition or disclosure in the 2013 financial statements.
The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
(b) Unaudited Quarterly Financial Information
The tables herein set forth the Company’s unaudited condensed
consolidated 2013 and 2012 quarterly statements of operations.
The following table sets forth the Company’s unaudited
condensed consolidated statement of operations for the 2013 quarters ended:
2013 Quarter Ended
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
Revenue
|
|
$
|
13,066,341
|
|
|
$
|
10,292,159
|
|
|
$
|
6,951,819
|
|
|
$
|
14,118,627
|
|
Net loss
|
|
|
(787,657
|
)
|
|
|
(1,018,912
|
)
|
|
|
(964,679
|
)
|
|
|
(23,151
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.00
|
)
|
The following table sets forth the Company’s unaudited
condensed consolidated statement of operations for the 2012 quarters ended:
2012 Quarter Ended
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
Revenue
|
|
$
|
8,556,779
|
|
|
$
|
9,266,635
|
|
|
$
|
15,540,852
|
|
|
$
|
14,309,861
|
|
Net loss
|
|
|
(172,192
|
)
|
|
|
(267,136
|
)
|
|
|
(2,268,914
|
)
|
|
|
(1,252,089
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.09
|
)
|