Note 1 – Significant Accounting Policies
Description of Business
TSS, Inc. (‘‘TSS’’,
the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’)
provides a comprehensive suite of 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 facilities in Dulles, Virginia, and Los Altos, California.
The accompanying consolidated balance sheet
as of December 31, 2016, which has been derived from audited consolidated financial statements, and the unaudited interim consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”)
for interim financial statements and pursuant to the rules and regulations of the SEC for interim reporting, and include the accounts
of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial
position of the Company and its consolidated results of operations, changes in stockholders’ equity (deficit) and cash flows.
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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 its assets and discharge its liabilities
in the normal course of business. Our history of operating losses, declining current ratio, and total stockholders’ deficit
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 concluded
that we have adequate resources to continue to operate as a going concern. Our operating results improved in the second half of
2016 and generated positive cash from operations. In September 2016, we sold a portion of our facilities maintenance business
for a purchase price of $950,000. During the fourth quarter of 2016, we elected to outsource a number of services that we had
previously performed internally, allowing us to further reduce our level of operating expenses. During the first quarter of 2017
we sold certain identified assets and liabilities used in a 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,
and allowed us to focus our business activities on systems integration and modular data center build and maintenance activities.
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 2017 or significantly affect our level of liquidity, which may require
us to take measures to reduce our operating costs or obtain funding in order 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.
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 fixed-price contracts, time-and-materials contracts, cost-plus-fee contracts
(including guaranteed maximum price contracts), facility service and maintenance contracts, and product shipments.
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.
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. 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, we furnish 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.
We recognize revenue from 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.
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 has increased. 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.
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 would suffer. The loss of or a significant reduction in orders from this customer or the
failure to provide adequate products or services to them would significantly reduce our revenue. We also periodically perform
large construction projects which may comprise a significant portion of our revenues during the construction phase, and which
may cause large fluctuations in our quarterly revenues.
The following customers accounted for a
significant percentage of our revenues for the periods shown:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
US-based IT OEM
|
|
|
63
|
%
|
|
|
22
|
%
|
US-based data center company
|
|
|
-
|
%
|
|
|
41
|
%
|
No other customers represented more than
10% of our revenues for any periods presented. A US-based IT services company represented 33% and 17% of our accounts receivable
at March 31, 2017 and December 31, 2016, respectively. Our US-based IT OEM customer represented 24% and 10% of our accounts receivable
at March 31, 2017 and December 31, 2016, respectively. A US-based equipment company represented 16% of our accounts receivable
at March 31, 2017. A US-based retail customer represented 25% of our accounts receivable at December 31, 2016. No other customer
represented more than 10% of our accounts receivable at March 31, 2017 or at December 31, 2016.
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 April 2016, the FASB issued
ASU 2016-10,
Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing
clarifying
the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost
and complexity of identifying promised goods or services and improves the guidance for determining whether promises are separately
identifiable. The amendments also provide implementation guidance on determining whether an entity's promise to grant a license
provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a
right to access the entity's intellectual property (which is satisfied over time). The effective date and transition requirements
for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09. 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. Management is still evaluating disclosure requirements under the new standard and will continue to evaluate the standard
as well as additional changes, modifications or interpretations which may impact current conclusions. We have engaged a third-party
to assist in the assessment and implementation of this standard. We are beginning to assess the impact that these standards will
have on our financial position and results of operations. Management expects to adopt the new standard using the modified retrospective
method.
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
Note 2 – Supplemental Balance
Sheet Information
Receivables
Contract and other receivables consist of
the following (in ‘000’s):
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Contract and other receivables
|
|
$
|
1,483
|
|
|
$
|
2,393
|
|
Allowance for doubtful accounts
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
$
|
1,477
|
|
|
$
|
2,389
|
|
Inventory
We state inventories
at the lower of cost or market, using the first-in-first-out-method (in ‘000’s):
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
68
|
|
|
$
|
61
|
|
less: Reserve
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Inventories, net
|
|
$
|
66
|
|
|
$
|
59
|
|
Goodwill and Intangible Assets
Goodwill and Intangible Assets consist
of the following (in ‘000’s):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
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
|
|
|
$
|
(350
|
)
|
|
$
|
906
|
|
|
$
|
(327
|
)
|
Acquired software
|
|
$
|
234
|
|
|
$
|
(180
|
)
|
|
$
|
234
|
|
|
$
|
(169
|
)
|
Trade name
|
|
$
|
60
|
|
|
|
(1
|
)
|
|
$
|
60
|
|
|
|
-
|
|
We recognized amortization expense
related to intangibles of approximately $35,000 and $34,000 for the three-month periods ended March 31, 2017 and 2016, respectively.
We have elected to use December
31 as our annual date to test goodwill and intangibles for impairment. 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. We performed a quantitative analysis of our goodwill and intangibles at December 31, 2016 as part of our
annual testing for impairment. We used a combination of valuation methodologies including income and market-based valuation methods,
with increased weighting on the income-based approaches and subject company stock-price methods as we felt these options more
accurately captured the operations of our reporting units. Although there were events and circumstances in existence at December
31, 2016 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, 2016 for our goodwill and other long-lived intangible assets.
There were no identified triggering events or circumstances that occurred during the three-month period ended March 31, 2017 that
would have required an interim impairment analysis of our goodwill and other long-lived intangible assets.
Property and Equipment
Property and equipment
consist of the following (in $’000):
|
|
Estimated Useful
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Lives
|
|
2017
|
|
|
2016
|
|
Vehicles
|
|
5 years
|
|
$
|
32
|
|
|
$
|
32
|
|
Trade equipment
|
|
5 years
|
|
|
162
|
|
|
|
162
|
|
Leasehold improvements
|
|
2 – 5 years
|
|
|
292
|
|
|
|
292
|
|
Furniture and fixtures
|
|
7 years
|
|
|
18
|
|
|
|
16
|
|
Computer equipment and software
|
|
3 years
|
|
|
1,354
|
|
|
|
1,324
|
|
|
|
|
|
|
1,858
|
|
|
|
1,826
|
|
Less accumulated depreciation
|
|
|
|
|
(1,383
|
)
|
|
|
(1,282
|
)
|
Property and equipment, net
|
|
|
|
$
|
475
|
|
|
$
|
544
|
|
Depreciation of property and equipment
and amortization of leasehold improvements and software totaled $0.1 million for each of the three-month periods ended March 31,
2017 and 2016.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses
consisted of the following (in $’000):
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Accounts payable
|
|
$
|
2,805
|
|
|
$
|
3,652
|
|
Accrued expenses
|
|
|
497
|
|
|
|
1,053
|
|
Compensation, benefits & related taxes
|
|
|
374
|
|
|
|
576
|
|
Other accrued expenses
|
|
|
20
|
|
|
|
38
|
|
Total accounts payable and accrued expenses
|
|
$
|
3,696
|
|
|
$
|
5,319
|
|
Note 3 – Long term borrowings
Long-term borrowings consisted of the following (in $’000):
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Convertible notes payable
|
|
$
|
100
|
|
|
$
|
250
|
|
Less unamortized discount
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Notes Payable due Feb. 2020
|
|
|
945
|
|
|
|
945
|
|
Less unamortized discount and debt issuance costs
|
|
|
(110
|
)
|
|
|
(120
|
)
|
|
|
|
933
|
|
|
|
1,071
|
|
Current portion of long-term borrowing
|
|
|
(98
|
)
|
|
|
(246
|
)
|
Non-current portion of long-term borrowing
|
|
$
|
835
|
|
|
$
|
825
|
|
We
currently have outstanding convertible notes payable to Gerard J. Gallagher, a director, Senior Technical Advisor and Founder
of the Company. As of March 31, 2017, there was an aggregate principal balance outstanding under the note of $100,000.
In December
2015, we amended the terms of the convertible notes payable to revise the future payment schedule and to extend the maturity date
of the promissory note from January 1, 2016 to July 1, 2017. Under the amended payment schedule, the Company made monthly principal
payments of $25,000 to Mr. Gallagher for a fourteen-month period beginning January 1, 2016 and ending on February 1, 2017. The
Company also made an additional principal payment of $100,000 on March 1, 2017. The remaining outstanding balance is due on July
1, 2017. The Company will continue to make monthly interest payments. The interest rate was also increased to an annual rate of
5% per annum effective January 1, 2016.
In connection
with the amendment to the convertible notes payable to Mr. Gallagher in December 2015, the Company and Mr. Gallagher entered into
a warrant agreement granting Mr. Gallagher the right to purchase up to 100,000 shares of the Company’s common stock. The
warrant is exercisable for a period of up to five years from December 21, 2016 with an exercise price of $0.15 per share. The
exercise price and number of shares of common stock issuable upon exercise of the 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 has been recorded as a discount against the balance of the convertible notes payable, and will be amortized to interest
expense over the remaining term of the convertible notes payable.
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.
The loan requires
interest-only payments made monthly, beginning March 1, 2015, and bears annual interest at a fixed rate of 12%. The loan has a
maturity date of February 3, 2020. We are able to prepay the loan at any time, subject to a prepayment fee of 1% of the amount
prepaid if the prepayment is made between February 4, 2017 and February 3, 2018.
The obligations
under the loan are secured by substantially all of our assets pursuant to the terms of a security agreement. In connection 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 granting MHW the right to purchase up to
1,115,827 shares of the Company’s common stock. The warrant is exercisable for a period of five years from February 3, 2015
at an exercise price of $0.50 for the first 472,500 shares, $1.00 for the next 425,250 shares and $1.30 for the final 218,077
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 warrant was approximately $204,000. Using the relative-fair value allocation method, the debt proceeds were allocated between
the debt value and the fair value of the warrant, resulting in a recognition of a discount on the loan of approximately $168,000
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. $8,000 was amortized during each of the three-month
periods ended March 31, 2017 and 2016, respectively.
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.
MHW Capital Management LLC is entitled to a performance related fee equal to 10% of any appreciation in the valuation of the common
stock in excess of the applicable strike price under the Warrant.
Note 4 – Receivables Factoring Agreement
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 receivables
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 receivables factoring agreement has
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 terminate the agreement at the end of the initial term upon 60 days’ notice and
payment of an early termination fee to RTS in the amount of $10,000. 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 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 for the three-month period ended March 31, 2017.
On July 1, 2016, we adopted ASU 2014-08
regarding discontinued operations. As a result, we evaluated the sale of a portion of our project maintenance business component
in light of this new standard. We concluded that the sale of a portion of our project management business component in January
2017 was not a “material shift” (as defined in ASU 2014-08) for us and therefore, is not considered a discontinued
operation. In accordance with ASU 2014-08, the following information is being provided:
|
|
Three- months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Pre-tax profit related to project management business sold
|
|
$
|
47
|
|
|
$
|
107
|
|
Note 6 - 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 purposes of determining diluted income per share, includes the effects of dilutive unvested restricted stock,
options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury
stock method or the if-converted method, as applicable.
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. The table below represents the numerator and shares represent the denominator (in thousands except per share amounts).
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic net income(loss) per share:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
254
|
|
|
$
|
(1,167
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
15,526
|
|
|
|
15,658
|
|
Basic net income(loss) per share
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
254
|
|
|
$
|
(1,167
|
)
|
Plus interest expense on convertible debt
|
|
|
2
|
|
|
|
-
|
|
|
|
|
256
|
|
|
|
(1,167
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
15,526
|
|
|
|
15,658
|
|
Effect of conversion of convertible notes
|
|
|
13
|
|
|
|
16
|
|
Number of shares used in diluted per-share computation
|
|
|
15,539
|
|
|
|
15,658
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
For the three-month
period ended March 31, 2017, potentially dilutive shares of 3,282,000 were excluded from the calculation of dilutive shares because
the options’ and warrant exercise prices were greater than the average market price of the common stock and the effect of
including them would have been anti-dilutive.
For the three-month
period ended March 31, 2016, potentially dilutive shares of 3,622,000 were excluded from the calculation of dilutive shares because
their effect would have been anti-dilutive due to the net loss in the period.
Note 7 – Related Party Transactions
We have $100,000 principal outstanding
at March 31, 2017 in convertible notes payable to Mr. Gallagher, a director, and our Senior Technical Advisor and Founder, net of
remaining discount of $2,000. The convertible notes bear interest at 5% per annum and are subordinated to our borrowings to MHW
and to RTS under our receivables financing agreement. Per the terms of the notes, we paid interest of $2,000 and $6,000 during
the three month periods ended March 31, 2017 and 2016, respectively. We repaid principal against the convertible notes of $150,000
and $75,000 in the three -month periods ended March 31, 2017 and 2016, respectively.
We have $945,000 principal outstanding
at March 31, 2017 in promissory notes payable to MHW, net of remaining discount of $110,000. Per the terms of the notes we paid
interest of $28,000 during each of the three-month periods ended March 31, 2017 and 2016, respectively. 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. MHW
Capital Management LLC is entitled to a performance-related fee equal to 10% of any appreciation in the valuation of the common
stock in excess of the applicable strike price under the warrant issued to MHW.
Note 8 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 results by reportable segment reconciled to reportable net loss for the three-month periods ended March 31, 2017
and 2016 and other segment-related information is as follows (in thousands):
|
|
Three Month Periods
|
|
|
|
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
2,488
|
|
|
$
|
6,733
|
|
System integration services
|
|
|
1,901
|
|
|
|
942
|
|
Total revenues
|
|
$
|
4,389
|
|
|
$
|
7,675
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
1,237
|
|
|
$
|
658
|
|
System integration services. .
|
|
|
272
|
|
|
|
(228
|
)
|
Other consolidated activities.
|
|
|
(1,209
|
)
|
|
|
(1,524
|
)
|
Consolidated income (loss from) operations
|
|
$
|
300
|
|
|
$
|
(1,094
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation expense:
|
|
|
|
|
|
|
|
|
System integration services
|
|
$
|
93
|
|
|
$
|
87
|
|
Other consolidated activities
|
|
|
11
|
|
|
|
19
|
|
Consolidated depreciation expense
|
|
$
|
104
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
—
|
|
|
$
|
—
|
|
System integration services
|
|
|
—
|
|
|
|
—
|
|
Other consolidated activities
|
|
|
77
|
|
|
|
80
|
|
Consolidated interest expense
|
|
$
|
77
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
Dec. 31,
2016
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
3,111
|
|
|
$
|
4,190
|
|
System integration services
|
|
|
1,760
|
|
|
|
1,938
|
|
Other consolidated activities
|
|
|
1,611
|
|
|
|
2,448
|
|
Total assets.
|
|
$
|
6,482
|
|
|
$
|
8,576
|
|
Other consolidated
activities relates to operating costs not specifically attributable to each business segment including sales, marketing, executive
and administrative support functions including activities such as finance, human resources and IT.