Note 2 – Acquisitions

On May 20, 2013, VTC, L.L.C. (the “Purchaser”), a wholly owned subsidiary of TSS, entered into an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Purchaser agreed to acquire certain assets and assume certain specified liabilities from arvato digital services LLC (the “Seller”) related to Seller’s data center integration business (the “Systems Integration business”) operated at its Round Rock, Texas facility.

The preliminary purchase price paid by the Purchaser under the Purchase Agreement is approximately $1,469,243, which included a negative purchase price adjustment of $5,757 to reflect the value of the purchased inventory and certain vendor prepaid amounts. A payment of $725,000 was paid in cash at closing, $375,000 was set aside in an escrow account for the purposes of satisfying any indemnification claims under the Purchase Agreement, and the balance of the purchase price of $369,243 was paid on July 1, 2013. During the three months and nine months ended September 30, 2013, the Company incurred $61,348 and $305,081, respectively, in acquisition costs associated with the purchase of the Systems Integration business. These costs were included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

The purchased assets include all inventory, furniture, fixtures, equipment, identified customer contracts, intellectual property (including certain proprietary software) and other assets used in the Systems Integration business. The Company also offered employment to certain employees of the Systems Integration business and assumed the Seller’s lease at the Round Rock, Texas facility for the remaining term.

The Purchaser and the Seller also entered into a Transition Services Agreement and a Software License Agreement whereby the Purchaser will license purchased proprietary software back to the Seller on a non-exclusive, perpetual, royalty-free basis, with certain territorial limitations.

The Company accounted for this transaction as a business combination using the acquisition method in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”). Under the acquisition method, the purchase price is allocated to underlying assets and liabilities based on their estimated fair values at the date of acquisition. The preliminary purchase price allocation includes goodwill and other intangible assets. Recognition of goodwill is largely attributable to the assembled workforce acquired and other factors. Goodwill is recognized in the Company’s only reportable segment as the acquisition did not result in the creation of a second reportable segment. The Company is in the process of preparing audited historical financial information of the Systems Integration business in accordance with the rules of the SEC and could identify potential adjustments to the fair value of assets acquired. The Company continues to refine the purchase price allocation and anticipates finalizing the allocation as soon as practicable but no later than one year from the acquisition date of May 20, 2013.

The following table summarizes the preliminary purchase price allocation:

	May 20,
	2013
Cash paid at acquisition date	$	725,000
Additional installments of preliminary purchase price		744,243
Preliminary acquisition consideration	$	1,469,243

Inventories	$	132,307
Other current assets		10,976
Fixed assets		48,133
Goodwill		137,827
Intangible assets		1,140,000
Preliminary net assets acquired	$	1,469,243

The amount of revenue and net loss of the Systems Integration business included in the Company’s unaudited condensed consolidated statement of operations were $1,118,838 and $510,511 for the three months ended September 30, 2013, respectively, and $1,770,961 and $512,550, for the nine months ended September 30, 2013, respectively.

Intangible assets included approximately $906,000 and $234,000 attributable to a customer-related intangible asset and a technology-based asset, respectively. The intangible assets attributable to the customer-related intangible asset are being amortized using the interest method, which is based on a valuation of the expected future cash flows derived from the customer-related intangible asset. The intangible assets attributable to the technology-based asset are being amortized on a straight-line basis over five years. The customer-related intangible asset represents the underlying relationships and agreements with the Seller’s existing customers. The technology-based asset represents internally developed software.

Certain acquired assets are accounted for at fair value, which is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value.

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.

Inventories, fixed assets and other assets were valued using Level 1 inputs. Intangibles were valued using Level 2 inputs.

The unaudited financial information in the table below summarizes the combined results of continuing operations of the Company and the Systems Integration business, on pro forma basis, as though the acquisition had occurred as of the first day of the twelve months ended December 31, 2012. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on that date or of results that may occur in the future. The unaudited pro forma financial information for the three and nine months ended September 30, 2013 and 2012 combines the historical results for the Company and the historical results for the Systems Integration business for the three and nine months ended September 30, 2013 and 2012.

	Three Months Ended				Nine Months Ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenue	$	10,292,159	$	13,656,169	$	45,268,618	$	47,504,840
Net loss from continuing operations	$	(957,564)	$	(290,369)	$	(1,143,100)	$	(3,937,944)
Basic loss per share	$	(0.07)	$	(0.02)	$	(0.08)	$	(0.27)
Diluted loss per share	$	(0.07)	$	(0.02)	$	(0.08)	$	(0.27)
Basic weighted average number of common shares outstanding		14,411,377		14,178,644		14,512,750		14,142,468
Diluted weighted average number of common shares outstanding		14,411,377		14,178,644		14,512,750		14,142,468

The pro forma net loss presented does not include non-recurring acquisition costs of $61,348 and $305,081 incurred during the three months and nine months ended September 30, 2013, respectively.