TSS, Inc.

The onset of the COVID-19 pandemic has had an immediate and ongoing impact on our operations in our facilities segment and our systems integration segment. Ongoing restrictions due to the pandemic could continue to negatively impact our facilities segment as we are unable to travel or face restricted access to customer sites to perform services. For example, a significant customer of this segment has restricted access to its data center sites, which prevented us from deploying new modular data centers and performing other activities for this customer, which contributed to an overall decrease in our facilities segment revenues in 2020, including a 28% decrease in deployment revenues compared to 2019. During the first and second quarter of 2020, our systems integration segment experienced a number of customer delays caused by interruptions in our largest customer’s supply chain. This customer was unable to source the necessary IT components for many of its jobs because of the effects of the pandemic on production facilities in China. These interruptions prevented us from performing integration services on those projects, and also delayed our ability to complete procurement and reseller services for some of our customers. We have also incurred additional personnel and operating costs to meet health and safety guidelines imposed because of the COVID-19 pandemic so that we could continue to operate our integration facility throughout the pandemic. The spread of the virus into our workforce could result in us having to temporarily disable our facilities preventing us from generating revenue. Similarly, if our customers or suppliers experience adverse business consequences due to COVID-19 or any other pandemic, demand for our services could also be materially adversely affected in a rapid manner. The magnitude and duration of potential social, economic and labor instability as a direct result of COVID-19 cannot be easily estimated at this time and can change as the pandemic evolves. Should any of these potential impacts continue for an extended period of time, the impact on our business could have a material adverse effect on our results of operations and our cash flows.

We perform an impairment test of goodwill on an annual basis with a measurement date of December 31, or whenever events or circumstances make it more likely than not that impairment of goodwill may have occurred. Our goodwill impairment test includes comparing the fair value of a reporting unit with its carrying amount. If the carrying value exceeds the reporting unit’s fair value, an entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of the reporting unit will be determined using a discounted cash flow, which requires the use of estimates and assumptions. Significant assumptions that may be required included forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may impact the conclusions reached.

In October 2020, the FASB issued Accounting Standards Update No. ASU 2020-10, Codification Improvements (“ASU 2020-10”).  The amendments in ASU 2020-10 did not change the GAAP requirements but it improves consistency by amending the Codification to include all disclosure guidance in the appropriate disclosure sections and also clarifies application of various provisions in the codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. ASU 2020-10 is effective for the company for fiscal years, and interim periods within those fiscal years, beginning January 1, 2021. Early application is permitted. We have assessed the impact of ASU 20202-10 and concluded that it does not have any material impact on our consolidated results of operations, cash flows, financial position or disclosures.

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 compare the fair value of a reporting unit with its carrying amount. If that fair value exceeds the carrying amount, no impairment charge is required to be recorded. If the carrying value exceeds the reporting unit’s fair value, an entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of the reporting unit will be determined using a discounted cash flow, which requires the use of estimates and assumptions. Significant assumptions that may be required included forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may impact the conclusions reached.

We have entered into a factoring agreement with a financial institution to sell certain of our accounts receivables from a US-based OEM customer under a non-recourse agreement. Under the arrangement, we sell certain trade receivables on a non-recourse basis and account for the transaction as sales of the receivable. The financial institution assumes the full risk of collection, without recourse to the Company in the event of a loss. Debtors are directed to send payments directly to the financial institution. The applicable receivables are removed from our consolidated balance sheet when the cash proceeds are received by us. We do not service any factored accounts after the factoring has occurred. We utilize this factoring arrangement as part of our financing for working capital. The aggregate gross amount factored under this arrangement was approximately $56.6 million and $33.2 million for the years ended December 31, 2020 and 2019, respectively. We paid financing fees under this arrangement of approximately $329,000 and $258,000 for the years ended December 31, 2020 and 2019, respectively of which $247,000 was recorded as cost of sales in 2020 for the amounts related to procurement transactions, and $82,000 was recorded in 2020 to interest expense for all other transactions, in our consolidated statement of operations.