Note
1
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 are in Round Rock, Texas, and we also have an office in Dulles, Virginia.
The pre
paration of financial statements in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are
not
readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable and that the actual results will
not
vary significantly from the estimated amounts.
The accompanying consolidated financial
statements have also been prepared on the basis that the Company will continue to operate as a going concern. Accordingly, assets and liabilities are recorded on the basis that the Company will be able to realize it assets and discharge its liabilities in the normal course of business. Our history of operating losses, negative working capital, and our stockholder’s deficiency cause substantial doubt about our ability to continue to operate our business as a going concern. We have reviewed our current and prospective sources of liquidity, significant conditions and events as well as our forecasted financial results and while we believe we have adequate plans to address these issues, there is still significant doubt about our ability to continue as a going concern. Our operating results have improved since the
second
half of
2016
and we generated net income in
2017,
improved our working capital position and reduced our stockholder’s deficiency. During
2016
we sold a portion of our facilities maintenance business in Maryland that was
not
geared towards the modular data center market for a purchase price of
$950,000,
and we made the decision to outsource multiple services including consulting engineering and project management that we had previously provided directly to our customers, allowing us to reduce our level of operating expenses.
During the
first
quarter of
2017,
we sold the remaining portion of our construction management business for
$350,000.
These actions, along with other cost reductions we made, provided additional capital for our business, lowered our total operating costs, improved our operating profits, and allowed us to focus our business activities on systems integration and modular data center build and maintenance activities. In
July 2017,
we modified and extended the term of our long-term debt and we also borrowed an additional
$650,000
in long-term debt, and in
October 2017
we borrowed another
$400,000
in long-term debt to help us improve our liquidity and manage our working capital. We believe that there are further adjustments that could be made to our business if we were required to do so.
Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs and our ability to secure additional sources of funding if needed. However, our revenue
may
not
meet our expectations, or our costs
may
exceed our estimates. Further, our estimates
may
change, and future events or developments
may
also affect our estimates. Any of these factors
may
change our expectation of cash usage in
2018
or significantly affect our level of liquidity, which
may
require us to seek additional financing or take other measures to reduce our operating costs or obtain funding to continue operating.
Any action to reduce operating costs
may
negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially impact our financial results depending on the level of cost reductions taken. These consolidated financial statements do
not
include any adjustments that might result from the Company
not
being able to continue as a going concern.
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, 2017
and
2016,
due to the short-term nature of these items. See
Note
8
– 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 revenue when pervasive evidence of an arrangement exists, the contract price is fixed or determinable, services have been rendered or goods delivered, and collectability is reasonably assured. Our revenue is derived from
facility service and maintenance contracts, product shipments, time-and-materials contracts, fixed price contracts, and cost-plus-fee contracts (including guaranteed maximum price contracts).
Revenue from facility service and maintenance contracts are usually performed under master and other service agreements billed on a fixed fee basis.
These services agreements are recognized on the proportional performance method or ratably over the course of the service period and costs are recorded as incurred in performance.
We recognize revenue from
integration of assembled products when the finished product is shipped, and collection of the resulting receivable is reasonably assured. In arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.
Revenue and related costs for master and other service agreements billed on a time and materials basis are recognized as the services are rendered based on actual labor hours performed at contracted billable rates, and costs incurred on behalf of the customer.
Revenue from fixed price contracts is recognized on the percentage of completion method. We apply Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
605
-
35,
Construction-Type and Production-Type Contracts
, recognizing revenue on the percentage-of-completion method using costs incurred in relation to total estimated project costs. This method is used because management considers costs incurred and estimated costs to complete to be the best available measure of progress in the contracts. Contract costs include all direct materials, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, payroll taxes, employee benefits and supplies.
Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred, plus an estimate of the applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as earned in proportion to the allowable costs incurred in performance of the contract.
Billings in excess of costs and estimated earnings on uncompleted contracts are classified as current liabilities. Costs and estimated earnings in excess of billings, or work in process, are classified as current assets for the majority of our projects. Work in process on contracts is based on work performed but
not
yet billed to customers as per individual contract terms.
Certain of our contracts involve the delivery of multiple elements including design management, system installation and facilities maintenance. Revenues from contracts with multiple element arrangements are recognized as each element is earned based on the relative selling price of each element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the service when it is sold separately or competitor prices for similar services
.
Shipping and Freight Costs
Costs to ship products to customers
, which consist primarily of freight expenses, are expensed as incurred and are included in
Cost of Revenue
. Total shipping and freight costs were approximately
$0.5
and
$0.2
million for the years ended
December 31, 2017
and
2016,
respectively.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. We
award shares of restricted stock and stock options to employees, managers, executive officers and directors.
During the years ended
December 31, 2017 and 2016,
we incurred approximately
$0
and
$7,000,
respectively, in non-cash compensation expense which is included in
Cost of Revenue
and in
2017
and
2016
we incurred approximately
$0.1
and
$0.2
million, respectively, in non-cash compensation expense which was included in
Selling, general and administrative expenses.
Concentration of Credit Risk
We are currently economically dependent upon our relationship with a large US-based IT Original Equipment Manufacturer (OEM). If this relationship is unsuccessful or discontinues, our business and revenue
may
suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it could significantly reduce our revenue.
The following customers accounted for a significant percentage of our revenues for the periods shown:
|
|
201
7
|
|
|
201
6
|
|
US-based IT OEM
|
|
|
67%
|
|
|
|
39%
|
|
US- based technology company
|
|
|
4%
|
|
|
|
12%
|
|
US-based data center company
|
|
|
0%
|
|
|
|
13%
|
|
No
other customers represented more than
10%
of our revenues for any periods presented. A US-based retail customer represented
25%
of our accounts receivable at
December 31, 2016.
Our US based IT OEM customer represented
26%
and
10%
of our accounts receivable at
December 31, 2017
and
2016,
respectively. A US-based UPS manufacturer represented
22%
and
15%
of our accounts receivable at
December
31,
2017
and
2016,
respectively. A US-based technology consulting company represented
23%
of our accounts receivable at
December 31, 2017.
A US-based technology company represented
17%
of our accounts receivable at
December 31, 2016.
No
other customer represented more than
10%
of our accounts receivable at
December 31, 2017
or at
December 31, 2016.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of
three
months or less, primarily consisting of bank time deposits
. At
December 31, 2017
and
2016
we did
not
have cash invested in interest bearing accounts. At
December 31, 2017,
we had unrestricted cash of
$1.95
million in excess of FDIC insured limits.
Contract and Other Receivables
A
ccounts receivable are recorded at the invoiced amount and
may
bear interest in the event of late payment under certain contracts. Included in accounts receivable is retainage, which represents the amount of payment contractually withheld by customers until completion of a particular project.
Under certain construction management contracts, the Company is obligated to obtain performance bonds with various financial institutions, which typically require a security interest in the corresponding receivable.
At
December 31, 2017
and
2016,
bonds outstanding totaled
$7.3,
million and the sureties were indemnified in the event of a loss by related project receivables of
$0.02
million and
$0.02
million, respectively.
Allowance for Doubtful Accounts
We estimate an allowance for doubtful accounts based on factors related to the specific credit risk of each customer. Historically our credit losses have been minimal. We perform credit evaluations of new customers and
may
require prepayments or use of bank instruments such as trade letters of credit to mitigate credit risk. As we expand our product offerings and customer base, our risk of credit loss
may
increase. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.
The following table summarizes the changes in our allowance for doubtful accounts (in
$’000
)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
4
|
|
|
$
|
19
|
|
Additions charged to expense
|
|
|
2
|
|
|
|
5
|
|
Recovery of amounts previously reserved
|
|
|
2
|
|
|
|
(7
|
)
|
Amounts written off
|
|
|
-
|
|
|
|
(13
|
)
|
Balance at end of year
|
|
$
|
8
|
|
|
$
|
4
|
|
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,
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, 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
no
impairment charge is required to be recorded. If that fair value does
not
exceed that carrying amount, we must perform the
second
step, which requires an allocation of the fair value of the reporting unit to all assets and liabilities of that unit as if the reporting unit had been acquired in a purchase business combination and the fair value of the reporting unit was the purchase price. The goodwill resulting from that purchase price allocation is then compared to the carrying amount with any excess recorded as an impairment charge.
We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount
may
not
be recoverable.
If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.
We have
elected to use
December 31
as our impairment date. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period, we will evaluate our indefinite lived intangible assets for impairment. The Company performed a quantitative analysis of our indefinite lived intangible assets at
December 31, 2017
and
2016
and concluded there was
no
impairment. Although there were events and circumstances in existence at both dates that suggest substantial doubt about our ability to continue as a going concern, the valuation results indicated that the fair value of our reporting units was greater than the carrying value, including goodwill, for each of our reporting units. Thus, we concluded that there was
no
impairment at
December 31, 2017
or
2016
for our goodwill and other long-lived intangible assets. At
December 31, 2017
and
2016,
the residual carrying value of goodwill was
$1.9
million.
Income Taxes
Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company
’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A full valuation allowance has been recorded against our net deferred tax assets, because we have concluded that under relevant accounting standards it is more likely than
not
that deferred tax assets will
not
be realizable. We recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.
Earnings
(Loss) Per
-
Common Share
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of shares outstanding for the year. Diluted earnings (loss) per common share is computed similarly; however, it is adjusted for the effects of the assumed exercise of our outstanding stock options and the vesting of outstanding shares of restricted stock, if applicable.
Treasury Stock
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
Issued Accounting Pronouncements
In
May 2014,
the FASB issued Accounting Standards Update
2014
-
09,
Revenue from Contracts with Customers.
ASU
2014
-
09
supersedes the revenue recognition requirements of FASB ASC Topic
605,
Revenue Recognition
and most industry-specific guidance throughout the ASC, resulting in the creation of FASB ASC Topic
606,
Revenue from Contracts with Customers
. ASU
2014
-
09
requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of adoption. In
August 2015,
the FASB issued ASU
2015
-
14,
Revenue from Contracts with Customers, Deferral of the Effective Date
. ASU
2015
-
14
defers the effective date of ASU
2014
-
09
to annual reporting periods beginning after
December 15, 2017
and interim periods within those reporting periods beginning after that date, and permits early adoption of the standard, but
not
before the original effective date for fiscal years beginning after
December 15, 2016.
In
March 2016,
the FASB issued ASU
2016
-
08,
Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In
May 2016,
the FASB issued ASU
No.
2016
-
12
Revenue from Contracts with Customers (Topic
606
): Narrow-Scope Improvements and Practical Expedients
, which clarifies guidance in certain narrow areas and adds a practical expedient for certain aspects of the guidance. The amendments do
not
change the core principle of the guidance in ASU
2014
-
09.
In
July
2015,
the FASB issued ASU
2015
-
14,
which delayed the effective date of ASU
2014
-
09.
As a result, this guidance will be effective for annual reporting periods beginning after
December
15,
2017,
including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after
December
15,
2016,
including interim reporting periods within that reporting period. We will adopt the new standard in the
first
quarter of
2018
using the modified retrospective method, and do
not
expect this standard to have a material impact on our consolidated financial position and results of operations.
In
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
-
02
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
-
02
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
-
02
on our consolidated financial statements
In
May 2017,
the FASB issued ASU
No.
2017
-
09,
which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC
718.
Specifically, an entity would
not
apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU
2017
-
09
will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017.
Early adoption is
not
permitted. We do
not
expect this new guidance to have a material impact on our consolidation financial statements.
Note
2
Supplemental Balance-sheet Information
Receivables
Contract and other
receivables consisted of the following (in
‘000’s
):
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Contract and other receivables
|
|
$
|
998
|
|
|
$
|
2,393
|
|
Allowance for doubtful accounts
|
|
|
(8
|
)
|
|
|
(4
|
)
|
Contract and other receivables, net
|
|
$
|
990
|
|
|
$
|
2,389
|
|
Inventories
We state inventories at the lower of cost or net realizable value, using the
first
-in-
first
-out-method
(in
‘000’s
) as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
|
136
|
|
|
|
61
|
|
Less: Reserve
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Inventories, net
|
|
$
|
134
|
|
|
$
|
59
|
|
Goodwill and Intangible Assets
Goodwill and Intangible Assets consisted of the following (in
‘000’s
):
|
|
December
3
1
, 201
7
|
|
|
December 31, 201
6
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,907
|
|
|
|
-
|
|
|
$
|
1,907
|
|
|
|
-
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
906
|
|
|
$
|
(418
|
)
|
|
$
|
906
|
|
|
$
|
(327
|
)
|
Acquired software
|
|
$
|
234
|
|
|
$
|
(216
|
)
|
|
$
|
234
|
|
|
$
|
(169
|
)
|
Trade name
|
|
$
|
60
|
|
|
$
|
(5
|
)
|
|
$
|
60
|
|
|
|
-
|
|
We recognized amortization expense related to intangibles of approximately
$143,000
and
$137,000
for the years ended
December 31, 2017
and
2016,
respectively.
Annual amortization expense for the acquired software will be approximately
$18,000
in
2018.
Amortization expense for the customer relationships is expected to be approximately
$91,000
during each year through
2022
and approximately
$35,000
in
2023.
Amortization expense for the trade name will be approximately
$6,000
per year during each year through
2026.
Property and equipment
Property and equipment consisted of the following
(in
$’000
):
|
|
Estimated Useful
|
|
|
December 31,
|
|
|
|
Lives (in years)
|
|
|
2017
|
|
|
2016
|
|
Vehicles
|
|
|
|
5
|
|
|
|
$
|
32
|
|
|
$
|
32
|
|
Trade equipment
|
|
|
|
5
|
|
|
|
|
162
|
|
|
|
162
|
|
Leasehold improvements
|
|
|
2
|
–
|
5
|
|
|
|
378
|
|
|
|
292
|
|
Furniture and fixtures
|
|
|
|
7
|
|
|
|
|
18
|
|
|
|
16
|
|
Computer equipment and software
|
|
|
|
3
|
|
|
|
|
1,448
|
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
2,038
|
|
|
|
1,826
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
(1,620
|
)
|
|
|
(1,282
|
)
|
Property and equipment, net
|
|
|
|
|
|
|
|
$
|
418
|
|
|
$
|
544
|
|
Depreciation of property and equipment and amortization of leasehold improvements
and software totaled
$0.3
and
$0.4
million for the years ended
December 31, 2017
and
2016,
respectively.
Accounts Payable
and Accrued Expenses
A
ccounts payable and accrued expenses consisted of the following (in
$’000
):
|
|
December 31,
|
|
|
|
2017
|
|
|
201
6
|
|
Accounts payable
|
|
$
|
1,413
|
|
|
$
|
3,652
|
|
Accrued expenses
|
|
|
847
|
|
|
|
1,053
|
|
Compensation, benefits and related taxes
|
|
|
567
|
|
|
|
576
|
|
Other accrued expenses
|
|
|
14
|
|
|
|
38
|
|
Total accounts payable and accrued expenses
|
|
$
|
2,841
|
|
|
$
|
5,319
|
|
Note
3
Long-term Borrowings
Long-term borrowings consisted of the following (in $
’000
):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Convertible notes payable
|
|
$
|
-
|
|
|
$
|
250
|
|
Less unamortized discount
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Notes Payable due July, 2022
|
|
|
1,995
|
|
|
|
945
|
|
Accrued interest
– long term
|
|
|
47
|
|
|
|
-
|
|
Less unamortized discount and debt issuance costs
|
|
|
(386
|
)
|
|
|
(120
|
)
|
|
|
|
1,656
|
|
|
|
1,071
|
|
Current portion of long-term borrowing
|
|
|
-
|
|
|
|
(246
|
)
|
Non-current portion of long-term borrowing
|
|
$
|
1,656
|
|
|
$
|
825
|
|
We repaid the remaining principal of our convertible note payable to Gerard J. Gallagher, a director, senior technical advisor and founder of the Company in
July 2017.
In
February 2015
we entered into a multiple advance term loan agreement and related agreements with MHW SPV II, LLC (‘‘MHW’’), an entity affiliated with the Chairman of our Board of Directors, for a loan in the maximum amount of
$2
million. We borrowed
$945,000
under the terms of this loan agreement on
February 3, 2015
and executed a promissory note to evidence this loan and the terms of repayment.
In
July 2017,
we amended and restated the terms of this multiple advance term loan agreement whereby we increased the maximum principal amount of loans to
$2.5
million for up to
sixty
days, and
$2
million thereafter. The term of the loan was modified to be
five
years from the date of modification, thereby extending the term of the
$945,000
loan to
July 19, 2022.
As part of this modification, the interest rate on the
$945,000
loan remains at a fixed annual rate of
12%,
however it was changed so that
6%
is paid in cash monthly in arrears, and
6%
is payable in kind, to be evidenced by additional promissory notes having an aggregate principal amount equal to the accrued but unpaid interest.
We can prepay the loan at any time, subject to a prepayment fee of (a)
4%
if the prepayment is made prior to
July 20, 2018, (
b)
2%
if the prepayment is made between
July 20, 2018
and
July 19, 2019,
and (c)
1%
if the prepayment is made between
July 20, 2019
and
July 19, 2020.
The
obligations under the loan are secured by substantially all our assets pursuant to the terms of a security agreement. With the receivables financing agreement described below, MHW executed a subordination agreement to evidence their agreement that their security interest is subordinated to the security interest of RTS Financial Services, Inc. in all of the Company’s present and future accounts receivable and all proceeds thereof.
In conjunction with entering into the loan agreement, the
Company and MHW also entered into a warrant agreement granting MHW the right to purchase up to
1,115,827
shares of the Company’s common stock. As part of the
July 2017
modification, we also modified the warrant to change the exercise price of the shares and to extend the term of the warrant to
July 19, 2022.
The warrant is now exercisable for a period of
five
years from
July 19, 2017
at an exercise price of
$0.10
for the
first
390,539
shares,
$0.20
for the next
390,539
shares and
$0.30
for the final
334,749
shares. The exercise price and number of shares of common stock issuable on exercise of the warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. The fair value of the modified warrant was determined to be approximately
$167,000
and the incremental value of the warrant compared to the original warrant was approximately
$6,000.
This amount was added to the remaining unamortized value of the original warrant such that approximately
$93,000
will be amortized using the straight-line method (which approximates the effective interest rate method) over the term of the loan. Amortization expense of
$26,000
and
$31,000
was recorded during each of the years ended
December 31, 2017
and
2016,
respectively for this warrant.
On
July 19, 2017,
we also borrowed an additional
$650,000
from MHW Partners, an entity affiliated with MHW. This loan ranks parri
-passu with the
$945,000
promissory notes held by MHW and is subject to the same loan agreement. Similar to the notes held by MHW, this note issued to MHW Partners bears interest at
12%
per annum payable in cash monthly in arrears at a rate of
6%
per annum and payable in kind at a fixed rate of
6%
per annum and has a maturity date of
July 19, 2022.
We can prepay the note issued to MHW Partners at any time, subject to a prepayment fee of (a)
4%
if the prepayment is made prior to
July 20, 2018, (
b)
2%
if the prepayment is made between
July 20, 2018
and
July 19, 2019,
and (c)
1%
if the prepayment is made between
July 20, 2019
and
July 19, 2020.
The obligations under the loan agreement and this promissory note are secured by substantially all of the Company
’s assets pursuant to the terms of an amended and restated security agreement. This security agreement amends and restates the security agreement entered into with MHW in
February 2015.
In conjunction with entering into this new loan, we entered into a warrant granting MHW Partners the right to purchase up to
767,500
shares of our common stock. The warrant is exercisable for a period of
5
years from
July 19, 2017,
at an exercise price of
$0.10
for the
first
268,625
shares,
$0.20
for the next
268,625
shares and
$0.30
for the final
230,250
shares. The exercise price and number of shares of common stock issuable upon exercise of this warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transactions. The fair value of the warrant granted was approximately
$115,000.
Using the relative-fair value allocation method, the debt proceeds were allocated between the debt value and the fair value of the warrants, resulting in a recognition of a discount on the loan of approximately
$98,000
and a corresponding increase to additional paid-in capital. This discount will be amortized using the straight-line method (which approximates the effective interest rate method) over the term of the loan. Approximately $
10,000
was amortized during the year ended
December 31, 2017.
Peter H. Woodward, the Chairman of our Board of Directors, is a principal of MHW Capital Management LLC, which is the investment manager of MHW
and MHW Partners. MHW Capital Management LLC is entitled to a performance-related fee tied to any appreciation in the valuation of the common stock in excess of the applicable strike price under the warrants.
On
October 6, 2017,
we entered into an amendment to our multiple advance term loan agreement and the related security agreement with MHW and MHW Partners, to add new lenders to the loan and security agreements. Upon execution, Mr. Glen Ikeda and Mr. Andrew Berg became new lenders to the Company. In accordance with the terms of the Amendment, Mr. Ikeda then provided a loan in the amount of
$300,000
and Mr. Berg provided a loan in the amount of
$100,000
(collectively the “New Loans”).
The New Loans have a maturity date of
July 19, 2022.
The New Loans do
not
bear interest and we are permitted to make optional prepayments at any time without premium or penalty, provided that if we prepay the outstanding principal amount of a New Loan prior to the
second
anniversary of the date of the applicable note, then the total amount of such prepayment will
not
exceed
95%
of the total principal amount of the applicable note and any remaining principal amount under the note shall be fully and finally cancelled, extinguished, forgiven and terminated without further action of any party.
The New Loans include customary affirmative covenants for secured transactions of this type, including compliance with laws, maintenance of insurance, maintenance of assets, timely payments of taxes and notice of adverse events. The loan agreement and ancillary documents include customary negative covenants including limitations on liens on assets of the Company.
Concurrent with the new loans, we entered into a warrant with Mr. Ikeda granting Mr. Ikeda the right to purchase up to
954,231
shares of our common stock. This warrant is exercisable until
July 19, 2022,
at an exercise price of
$0.10
for the
first
498,981
shares,
$0.20
for the next
273,981
shares and
$0.30
for the final
181,269
shares. The exercise price and number of shares of common stock issuable on exercise of this warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction.
Concurrent with the new loans, we entered into a warrant with Mr. Berg granting Mr. Berg the right to purchase up to
318,077
shares of our common stock. This warrant is exercisable until
July 19, 2022,
at an exercise price of
$0.10
for the
first
166,327
shares,
$0.20
for the next
91,327
shares and
$0.30
for the final
60,423
shares. The exercise price and number of shares of common stock issuable on exercise of this warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction.
The fair value of the
two
warrants granted in connection with the New Loans was approximately
$367,000.
Using the relative fair-value allocation method, the debt proceeds were allocated between the debt value and the fair value of the warrants, resulting in a recognition of a discount on the new loans of approximately
$191,000,
with a corresponding increase to additional paid-in capital. This discount will be amortized to interest expense over the term of the loan using the straight-line method (which approximates the effective interest rate method.)
Approximately
$10,000
was amortized during the year ended
December 31, 2017.
Future principal repayments on the notes payable as at
December 31, 2017
are as follows (in $
’000
):
2018
|
|
$
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
2,042
|
|
Total
|
|
$
|
2,042
|
|
Note
4
-
Receivables Financing Liability
In
May 2016,
we entered into a receivables-factoring agreement with RTS Financial Service, Inc. (“RTS”). Under the terms of this agreement, we
may
offer for sale, and RTS in its sole discretion
may
purchase our eligible receivables (the “Purchased Accounts”). Upon purchase RTS becomes the absolute owner of the Purchased Accounts, which are payable directly to RTS, subject to certain repurchase obligations by us.
RTS
’s fee for each Purchased Account is computed on a daily basis until the amount of the Purchased Account is paid to RTS, and such fee equals the amount of the Purchased Account multiplied by the sum of the prime rate then in effect plus
7%,
divided by
360.
RTS will pay us
80%
of the amount of the Purchased Accounts upon purchase and the balance (less fees) is paid to us upon collection of the Purchased Account by RTS.
Our
obligations under the factoring agreement are secured by all present and future accounts receivable (provided, however that accounts for
one
customer are excluded) and all chattel paper, instruments, general intangibles, securities, contract rights, insurance, proceeds, property rights and interests associated therewith, as well as all equipment, inventory and deposit accounts of the Company.
RTS
may
require
us to repurchase a Purchased Account if we breach any warranty or otherwise violate or default on any of our obligations under the factoring agreement or if the Purchased Account is
not
paid in full on or before the payment due date of such Purchased Account or within
120
days after the invoice date of such Purchased Account.
The
agreement had an initial term of
12
months and automatically renews for successive
12
-month renewal periods unless terminated pursuant to the terms of the agreement. We
may
also terminate the agreement at any time during the
first
24
months upon
30
days’ notice and payment of an early termination fee based on the average monthly amount purchased during the term of the agreement. RTS
may
terminate the agreement upon
90
days’ notice to us or immediately upon the occurrence of certain events.
Note
5
– Sale of Business Component
On
January 31, 2017,
we completed the sale of certain identified assets and liabilities associated with a specific customer contract from our project management business for
$350,000
pursuant to an Asset Purchase Agreement (“APA”) dated
December 12, 2016
with Tech Site Services, LLC, a privately held Maryland company. The sale price was subject to certain post-closing adjustments relating to working capital and obtaining the consent of the customer as a condition of closing. Tech Site Services, LLC also must pay us an earn-out payment equal to
10%
of all revenue generated under the customer contract in excess of
$2.5
million in each
12
-month period during the
two
-year period after the closing of this transaction.
The managing member of Tech Site Services, LLC is Thomas P. Rosato and the Company leased our Maryland office until
December 2016
from an entity that is
fifty
percent owned by Mr. Rosato. Rents paid under this lease were
$253,000
in the year ended
December 31, 2016.
The transaction closed on
January 31, 2017.
The APA contains representations, warranties, covenants and indemnification provisions customary for a transaction of this type. Many of the representations made by us are subject to, and qualified by materiality or similar concepts. Both parties have agreed to indemnify the other party for certain losses arising from the breach of the APA and for certain other liabilities, subject to specified limitations. In connection with the transaction both parties will provide transition services with respect to the business activities that were sold.
The customer contract and intellectual property sold had a net book value of
$0.
As a result of the sale, Tech Site Services, LLC assumed liabilities of $
7,000,
resulting in
$343,000
of cash proceeds that was paid to us upon closing. Additionally, we incurred approximately
$29,000
in legal, escrow and other expenses that would
not
have been incurred otherwise. As a result, we recorded a net gain of approximately
$321,000
in our consolidated statement of operations during the year ended
December
31, 2017.
On
September 28, 2016,
we sold certain identified assets and liabilities connected with our Maryland-based facilities maintenance business component for
$950,000
pursuant to an Asset Purchase Agreement dated
September 28, 2016
with Tech Site Services, LLC. The sale price was subject to certain post-closing adjustments relating to working capital and certain customer contracts of the business.
The customer contracts and intellectual property sold in
September 2016
had a net book value of
$0.
As a result of the sale, Tech Site Services, LLC assumed liabilities of
$308,000,
resulting in
$642,000
of cash proceeds. Additionally, we incurred approximately
$40,000
in legal, escrow and other expenses that would
not
have been incurred otherwise. As a result, we recorded a net gain of approximately
$910,000
in our consolidated statement of operations for the year ended
December 31, 2016.
As noted above, on
July 1, 2016
we adopted ASU
2014
-
08
regarding discontinued operations. As a result, we evaluated both the sale of the specific customer contract and the sale of a portion of our facilities maintenance business component in light of this new standard. We concluded that neither of these transactions were a “material shift” (as defined in ASU
2014
-
08
) for us and therefore, were
not
considered a discontinued operation. In accordance with ASU
2014
-
08,
the following information is being provided:
|
|
Years Ended December 31,
|
|
|
|
201
7
|
|
|
201
6
|
|
Pre-tax profit related to facilities maintenance business
|
|
$
|
-
|
|
|
$
|
812
|
|
Pre-tax profit related to specific customer contract
|
|
$
|
93
|
|
|
$
|
478
|
|
Pro forma impact of disposition of facilities maintenance business
The following unaudited pro forma combined results of operations are provided for the
years ended
December 31, 2017
and
2016
as though both of these disposition occurred on
January 1, 2016.
The unaudited pro forma consolidated statement of operations for the
years ended
December 31, 2017
and
2016
reflect the following adjustments:
|
(
1
)
|
Eliminates the revenues and cost of goods sold as if the transaction occurred on
January 1,
201
6
|
|
(
2
)
|
Eliminates operating expenses including salary and related costs for employees who transferred as if this transaction occurred on
January 1,
201
6.
|
The unaudited pro forma consolidated financial information is provided for illustrative purposes only and does
not
purport to represent what the actual results of operations would have been had the transaction occurred on the respective date assumed, nor is it necessarily indicative of the Company
’s future operating results. However, the pro forma adjustments reflected in the accompanying unaudited pro forma financial information reflect estimates and assumptions that the Company’s management believes to be reasonable.
Pro forma adjustments related to the unaudited pro forma consolidated statement of operations for the
years ended
December 31, 2017
and
2016
were computed assuming the transactions were consummated on
January 1, 2016
and include adjustments which give effect to events that are (i) directly attributable to the transaction, (ii) expected to have a continuing effect on the Company, and (iii) factually supportable.
|
|
Years ended December 31,
|
|
(unaudited, in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
(Pro forma)
|
|
|
(Pro forma)
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,311
|
|
|
$
|
22,845
|
|
Net income (loss)
|
|
$
|
358
|
|
|
$
|
(2,655
|
)
|
Basic and diluted net income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
(0.17
|
)
|
Note
6
– 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
(in
$’000
):
|
|
Year Ended December 31,
|
|
|
|
201
7
|
|
|
201
6
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
19
|
|
|
|
12
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
6,290
|
|
|
|
(217
|
)
|
State
|
|
|
(4
|
)
|
|
|
1
|
|
Total provision (benefit) for income taxes before valuation allowance
|
|
$
|
6,305
|
|
|
$
|
(204
|
)
|
Change in valuation allowance
|
|
|
(6,296
|
)
|
|
|
223
|
|
Total provision for income taxes
|
|
$
|
9
|
|
|
$
|
19
|
|
The significant components of
our deferred tax assets and liabilities are as follows (in
$’000
):
|
|
December 31,
|
|
|
|
201
7
|
|
|
201
6
|
|
Deferred tax assets
:
|
|
|
|
|
|
|
|
|
Accrued expense
s
|
|
$
|
65
|
|
|
$
|
69
|
|
Net operating loss carryove
r
|
|
|
8,792
|
|
|
|
13,387
|
|
Goodwill and other intangible
s
|
|
|
1,665
|
|
|
|
3,254
|
|
Deferred compensatio
n
|
|
|
135
|
|
|
|
247
|
|
Depreciatio
n
|
|
|
39
|
|
|
|
55
|
|
Other carryovers and credit
s
|
|
|
12
|
|
|
|
10
|
|
Total deferred tax asset
s
|
|
|
10,708
|
|
|
|
17,022
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
:
|
|
|
|
|
|
|
|
|
Prepaid expense
s
|
|
$
|
(
20
|
)
|
|
$
|
(
38
|
)
|
Depreciatio
n
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax liabilitie
s
|
|
|
(
20
|
)
|
|
|
(
38
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowanc
e
|
|
|
(
10,688
|
)
|
|
|
(
16,984
|
)
|
Net deferred tax asset (liability
)
|
|
$
|
-
|
|
|
$
|
-
|
|
At
December 31,
201
7
and
2016,
we had net operating losses (“NOL”) totaling
$37.7
million and
$36.9
million, respectively, to be carried forward
20
years to offset future taxable income and any unused NOL will begin to expire in
2027.
We do
not
believe our NOL will be limited under Internal Revenue Code (“IRC”) Section
382
and believe 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. We have
not
undertaken a detailed study in connection with IRC Section
382
in order to determine if there is any limitation of the utilization of our NOL carryforward. If IRC Section
382
limitation were deemed to apply, our gross deferred tax asset and its corresponding valuation allowance could be reduced. The
2017
Tax cuts and Jobs Act revised the use of net operating loss carryforwards and limits them to
80%
of taxable income each year, but removed the limitation on years carried forward.
Our
provision for income taxes reflects the establishment of a full valuation allowance against deferred tax assets as of
December
31,2017
and
2016.
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. In determining our provision/(benefit) for income taxes, net deferred tax assets, liabilities and valuation allowances, we are 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 our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from the projections.
We have
adopted the provisions of the guidance related to accounting for uncertainties in income taxes. We have analyzed our current tax reporting compliance positions for all open years and have determined that it does
not
have any material unrecognized tax benefits. Accordingly, we have omitted the tabular reconciliation schedule of unrecognized tax benefits. We do
not
expect a material change in unrecognized tax benefits over the next
12
months. All of our prior federal and state tax filings from the
2014
tax year forward remain open under statutes of limitation. Operating losses generated in years prior to
2014
remain open to adjustment until the statute closes for the tax year in which the net operating losses are utilized.
The
Company’s provision (benefit) for income taxes attributable to continuing operations differs from the expected tax benefit amount computed by applying the statutory federal income tax rate of
34%
to income (loss) before taxes for the years ended
December 31, 2017
and
2016,
primarily as a result of the following::
|
|
Year Ended December 31
,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rat
e
|
|
|
34
|
%
|
|
|
34
|
%
|
State tax, net of income tax benefi
t
|
|
|
4
|
%
|
|
|
1.9
|
%
|
Effect of permanent difference
s
|
|
|
11
|
%
|
|
|
(11.7
|
)%
|
Change in valuation allowanc
e
|
|
|
(48.0
|
)%
|
|
|
(26.2
|
)%
|
Tota
l
|
|
|
1
|
%
|
|
|
(2.0
|
)%
|
The Tax Cuts and Jobs Act was enacted on
December 22, 2017.
The Act reduces the US federal corporate tax rate from
35%
to
21%.
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%.
The remeasurement of our deferred tax balance was fully offset by the application of our valuation allowance. The accounting for the effects of the rate change on deferred tax balances is expected to be complete, and consequently
no
provisional amounts were recorded for this item.
Note
7
– Commitments and Contingencies
We lease premises and equipment under operating leases having terms from month-to-month to
5
years. At
December 31, 2017,
future minimum lease payments under leases having an initial or remaining non-cancellable lease term in excess of
one
year including known escalation clauses are as set forth in this table below (in $
’000
):
Year
|
|
|
|
|
201
8
|
|
$
|
698
|
|
2019
|
|
|
722
|
|
2020
|
|
|
776
|
|
2021
|
|
|
800
|
|
2022
|
|
|
190
|
|
Total
|
|
$
|
3,186
|
|
For the years ended
December 31, 2017
and
2016,
rent expense included in selling, general and administrative expenses for operating leases was $
0.3
million and
$0.5
million, respectively. For the years ended
December 31, 2017
and
2016,
rent expense included in cost of revenue for operating leases was
$0.7
million and
$0.4
million, respectively.
In the normal course of business, we issue binding purchase orders to subcontractors and equipment suppliers. At
December 31, 2017,
these open purchase order commitments amount to approximately
$0.5
million. The majority of services delivered and equipment received is expected to be satisfied during the
first
six
months of
2018
at which time these commitments will be fulfilled.
From time to time,
we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. We currently estimate that a material adverse effect on our financial position, results of operations and cash flows from such matters is
not
reasonably likely.
Note
8
– 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, 2017,
we 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.
Note
9
–
Share Based Payments
In
January 2007,
our
stockholders approved the Company’s
2006
Omnibus Incentive Compensation Plan, which was designed to attract, retain and motivate key employees. Under this plan, we reserved
5.1
million shares of our common stock for issuance to employees and directors through incentive stock options, non-qualified stock options or restricted stock. In
June 2015
our stockholders approved a new
2015
Omnibus Incentive Compensation Plan (the “Plan”) and reserved a further
2.5
million shares of our common stock for issuance to employees and directors through incentive stock options, non-qualified stock options or restricted shares. At
December 31, 2017,
2,576,000
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
compensation 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. We have historically issued restricted stock under the Plan; 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, 2017
and
2016.
Stock-based Compensation Expense
For the year ended
December 31,
201
7,
we recognized stock-based compensation of
$68,000.
For the year ended
December 31, 2016,
the Company recognized stock-based compensation of
$193,000
of which approximately
$7,000
was included in
Cost of Revenue
.
As of
December 31,
201
7,
the total unrecognized compensation cost related to unvested restricted stock and options to purchase common stock was approximately
$45
thousand with a weighted average remaining vest life of
1.1
years.
Stock Options
Although we had historically issued restricted stock under the Plan, we also issued options to purchase shares of our common stock during the years ended
December 31, 2017
and
2016.
The grants have various vesting features but typically involve time-based vesting.
Fair Value Determination
–We utilize a Black-Scholes-Merton model to value stock options vesting over time. We will reconsider the use of the Black-Scholes-Merton model 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 our share price through weekly observations of our trading history corresponding to the expected term for Black-Scholes-Merton model.
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. We currently do
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, 2017:
|
|
Black-Scholes-Merton
|
|
|
|
|
|
|
Volatility
|
|
|
173
|
%
|
Expected life of options (in years)
|
|
|
5
|
|
Risk-free interest rate
|
|
|
1.93
|
%
|
Dividend yield
|
|
|
0
|
%
|
During the years ended
December 31, 2017
and
2016
, we granted stock options to purchase
2.557
million and
0.06
million
shares, respectively, of common stock at a weighted-average exercise price of
$0.10
and
$0.10
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, 2017
and
2016,
as determined under the Black-Scholes-Merton valuation model
was
$0.10
and
$0.06,
respectively
.
The following table includes information with respect to stock option activity and stock options outstanding for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Life (years)
|
|
|
Value*
|
|
Shares under option, January 1, 2016
|
|
|
2,405,000
|
|
|
$
|
0.48
|
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
60,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Options cancelled and expired
|
|
|
(245,000
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2016
|
|
|
2,220,000
|
|
|
$
|
0.48
|
|
|
|
6.15
|
|
|
|
|
|
Options granted
|
|
|
2,557,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Options cancelled and expired
|
|
|
(2,316,000
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
Shares under option, December 31, 2017
|
|
|
2,461,000
|
|
|
$
|
0.15
|
|
|
|
9.27
|
|
|
$
|
687
|
|
*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, 2017
and
2016
:
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested stock options at January 1, 201
6
|
|
|
1,685,000
|
|
|
$
|
0.36
|
|
Options granted
|
|
|
60,000
|
|
|
$
|
0.13
|
|
Vested during period
|
|
|
(200,000
|
)
|
|
$
|
(0.52
|
)
|
Options cancelled
|
|
|
(205,000
|
)
|
|
$
|
(0.30
|
)
|
Non-vested shares under option, December 31, 201
6
|
|
|
1,340,000
|
|
|
$
|
0.34
|
|
Options granted
|
|
|
2,557,000
|
|
|
$
|
0.13
|
|
Vested during period
|
|
|
-
|
|
|
$
|
-
|
|
Options cancelled
|
|
|
(1,760,000
|
)
|
|
$
|
(0.29
|
)
|
Non-vested shares under option, December 31, 201
7
|
|
|
2,137,000
|
|
|
$
|
0.13
|
|
The following table includes information concerning stock options exercisable and stock options expected to vest at
December 31, 2017
:
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Life (years)
|
|
|
Price
|
|
|
Value
|
|
Stock options exercisable
|
|
|
324,000
|
|
|
|
4.62
|
|
|
$
|
0.47
|
|
|
$
|
3
|
|
Stock options expected to vest
|
|
|
2,137,000
|
|
|
|
9.27
|
|
|
$
|
0.10
|
|
|
$
|
684-
|
|
Options exercisable and expected to vest
|
|
|
2,461,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
We have 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
two
or
three
years in in equal installments on the 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 year ended
December 31,
201
6
was
$7,000
and was calculated using the value of TSS’ common stock on the grant date.
No
restricted stock was awarded during the year ended December
31,
2017.
The value of awards are 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, 2017
and
2016,
respectively.
The following table summarizes the restricted stock activity during the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested January 1, 201
6
|
|
|
720,000
|
|
|
$
|
0.55
|
|
Granted restricted stock
|
|
|
84,000
|
|
|
$
|
0.08
|
|
Cancelled restricted stock
|
|
|
(80,000
|
)
|
|
|
(0.37
|
)
|
Vested restricted stock
|
|
|
(475,000
|
)
|
|
$
|
(0.52
|
)
|
Unvested December 31, 201
6
|
|
|
249,000
|
|
|
$
|
0.45
|
|
Granted restricted stock
|
|
|
-
|
|
|
$
|
-
|
|
Cancelled restricted stock
|
|
|
(54,000
|
)
|
|
|
(0.08
|
)
|
Vested restricted stock
|
|
|
(165,000
|
)
|
|
$
|
(0.62
|
)
|
Unvested December 31, 201
7
|
|
|
30,000
|
|
|
$
|
0.15
|
|
Note
10
–
Common Stock Repurchases
During the year
s ended
December 31, 2017
and
2016,
we repurchased
20,567
and
23,923
shares of our common stock, respectively, with an aggregate value of approximately
$3,800
and
$1,600
respectively, associated with the vesting of restricted stock held by employees. Per terms of the restricted stock agreements, for certain employees we 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
11
– Related Party Transactions
During
2016
we leased our facility in Columbia, Maryland from an entity that is
50%
owned by Gerard Gallagher, a director and our senior technical advisor. This lease was terminated in
November 2016.
Rents paid under this agreement were
$253,000
during the year ended
December 31, 2016.
We have
$945,000
principal outstanding at
December 31, 2017
in promissory notes payable to MHW, net of remaining discount of
$84,000.
Per the terms of the notes, we paid interest of approximately $
114,000
during each of the years ended
December 31, 2017
and
2016,
respectively. We have
$650,000
principal outstanding at
December 31, 2017
in promissory notes payable to MHW Partners, net of remaining discount of
$88,000.
Per the terms of the notes, we paid interest of approximately
$36,000
during the year ended
December 31, 2017.
Peter H. Woodward, the Chairman of our Board of Directors, is a principal of MHW Capital Management, LLC which is the investment manager of MHW and MHW Partners. MHW Capital Management LLC is entitled to a performance-related fee tied to appreciation in the valuation of the common stock in excess of the applicable strike price under the warrant issued to MHW and MHW Partners.
We have
$300,000
in principal outstanding at
December 31, 2017
in promissory notes payable to Mr. Glen Ikeda, a shareholder in the Company. The loan matures
July 19, 2022
and bears
no
interest. We are permitted to make optional payments at any time without penalty. We issued Mr. Ikeda a warrant to purchase up to
954,231
shares of our common stock in connection with entering into the promissory notes.
Note
12
– Net Income (Loss) Per-Share
Basic and diluted
income (loss) 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 purpose 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.
The following table presents a reconciliation of the numerators and denominators of the basic and diluted
income (loss) per share computations for income (loss) from continuing operations. In the table below, income (loss) represents the numerator and shares represent the denominator (in thousands except per share amounts):
|
|
Years
Ended
December 31
,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
766
|
|
|
$
|
(1,023
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
15,505
|
|
|
|
15,405
|
|
Basic net income (loss) per share
|
|
$
|
0.05
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
:
|
|
|
|
|
|
|
|
|
Numerator
:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
766
|
|
|
$
|
(1,023
|
)
|
Plus interest expense on convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
766
|
|
|
$
|
(1,023
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
15,505
|
|
|
|
15,405
|
|
Dilutive options and warrants outstanding
|
|
|
1,156
|
|
|
|
-
|
|
Effect of conversion of convertible notes
|
|
|
3
|
|
|
|
-
|
|
Number of
shares used in diluted per-share computation
|
|
|
16,664
|
|
|
|
15,405
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
0.05
|
|
|
$
|
(0.07
|
)
|
For the years ended
December 31, 2017
and
2016,
potentially dilutive shares of
324,000
and
3,539,000
were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive in those periods.
Note
1
3
Segment Reporting
Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by our chief operating decision-maker in assessing performance and allocating resources. Our activities are organized into
two
major segments: facilities, and systems integration. Our facilities unit is involved in the design, project management and maintenance of data center and mission-critical business operations. Our systems integration unit integrates IT equipment for OEM vendors and customers to be used inside data center environments, including modular data centers. All of our revenues are derived from the U.S. market. Segment operating results reflect earnings before stock-based compensation, acquisition related expenses, other expenses, net, and provision for income taxes.
Revenue and operating result by reportable segment reconciled to reportable net income for the years ended
December 31, 2017
and
2016
and other segment-related information is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
201
7
|
|
|
201
6
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
12,254
|
|
|
$
|
21,751
|
|
Systems integration services
|
|
|
6,062
|
|
|
|
5,622
|
|
Total
revenues
|
|
$
|
18,316
|
|
|
$
|
27,373
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
2,816
|
|
|
$
|
551
|
|
Systems integration services
|
|
|
(1,710
|
)
|
|
|
(1,184
|
)
|
Consolidated operating income (loss)
|
|
$
|
1,106
|
|
|
$
|
(633
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation expense:
|
|
|
|
|
|
|
|
|
Facilities design and maintenance
|
|
$
|
33
|
|
|
$
|
64
|
|
Systems integration services
|
|
|
306
|
|
|
|
383
|
|
Consolidated depreciation expense
|
|
|
339
|
|
|
$
|
447
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Facilities design and maintenance
|
|
$
|
184
|
|
|
$
|
294
|
|
Systems integration services
|
|
|
144
|
|
|
|
71
|
|
Consolidated interest expense
|
|
$
|
328
|
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
2,682
|
|
|
$
|
4,190
|
|
Systems integration services
|
|
|
1,572
|
|
|
|
1,938
|
|
Other consolidated activities
|
|
|
2,473
|
|
|
|
2,448
|
|
Total assets
|
|
$
|
6,727
|
|
|
$
|
8,576
|
|
Other consolidated activities includes assets
not
specifically attributable to each business segment including cash, prepaid and other assets that are managed at a corporate level.