TSS, Inc 10-Q for FY2022 Q1
TSS, Inc. (TSSI)
About this 10-Q
TSS, Inc filed this 10-Q on May 16, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.19M
- up 0.4% from $5.17M a year earlier
- Net loss
- $308K
- compared with a net loss of $699K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
TSS, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act : None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of May 15, 2022
TSS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2022
| “SAFE HARBOR” STATEMENT |
ii |
| PART I–FINANCIAL INFORMATION |
1 |
| Item 1. Consolidated Financial Statements |
1 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
20 |
| Item 4. Controls and Procedures |
20 |
| PART II–OTHER INFORMATION |
20 |
| Item 1. Legal Proceedings |
20 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
21 |
| Item 5. Other Information | 21 |
| Item 6. Exhibits |
22 |
“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward- looking statements made in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as those made in other filings with the SEC.
Forward looking statements can be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee” or other similar words. Such forward looking statements are based on management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.
As used herein, except as otherwise indicated by the context, the terms “TSS”, “Company”, “we”, “our” and “us” are used to refer to TSS, Inc. and its subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TSS, Inc.
Consolidated Balance Sheets
(in thousands except par values)
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Contract and other receivables, net | ||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenues | ||||||||
| Current portion of long-term borrowings | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current portion of lease liabilities | ||||||||
| Non-current portion of deferred revenues | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value; shares authorized at March 31, 2022 and December 31, 2021; issued | ||||||||
| Common stock, $ par value; shares authorized at March 31, 2022 and December 31, 2021; and issued; and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock and shares at cost at March 31, 2022 and December 31, 2021 | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Consolidated Statements of Operations
(in thousands, except per-share amounts; unaudited)
| Three Months Ended March 31 |
||||||||
| 2022 |
2021 |
|||||||
| Results of Operations: |
||||||||
| Revenue |
$ | $ | ||||||
| Cost of revenue |
||||||||
| Gross profit |
||||||||
| Selling, general and administrative expenses |
||||||||
| Depreciation and amortization |
||||||||
| Total operating costs |
||||||||
| Loss from operations |
( |
) |
( |
) |
||||
| Other income (expense): |
||||||||
| Interest expense, net |
( |
) |
( |
) |
||||
| Loss from operations before income taxes |
( |
) |
( |
) |
||||
| Income tax expense |
||||||||
| Net loss |
$ | ( |
) |
$ | ( |
) |
||
| Basic & diluted (loss) per common share |
$ | ( |
) |
$ | ( |
) |
||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts, unaudited)
| Additional |
Total |
|||||||||||||||||||||||||||
| Common Stock |
Paid-in |
Treasury Stock |
Accumulated |
Stockholders' |
||||||||||||||||||||||||
| Shares |
Amount |
Capital |
Shares |
Amount |
Deficit |
Equity |
||||||||||||||||||||||
| Balance January 1, 2021 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
| Stock options exercised |
||||||||||||||||||||||||||||
| Treasury shares repurchased |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
| Restricted stock vested |
||||||||||||||||||||||||||||
| Stock-based compensation |
- | - | - | |||||||||||||||||||||||||
| Net loss |
- | - | ( |
) |
( |
) |
||||||||||||||||||||||
| Balance at March 31, 2021 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
| Additional |
Total |
|||||||||||||||||||||||||||
| Common Stock |
Paid-in |
Treasury Stock |
Accumulated |
Stockholders' |
||||||||||||||||||||||||
| Shares |
Amount |
Capital |
Shares |
Amount |
Deficit |
Equity |
||||||||||||||||||||||
| Balance January 1, 2022 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
| Restricted stock vested |
||||||||||||||||||||||||||||
| Treasury shares repurchased |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
| Stock-based compensation |
- | - | - | |||||||||||||||||||||||||
| Net loss |
- | - | ( |
) |
( |
) |
||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Consolidated Statements of Cash Flows
(in thousands; unaudited)
| Three Months Ended March 31 |
||||||||
| 2022 |
2021 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net loss |
$ | ( |
) |
$ | ( |
) |
||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Non-cash interest |
||||||||
| Amortization of debt discount |
||||||||
| Stock-based compensation |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Contract and other receivables |
||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
( |
) |
||||||
| Inventories, net |
( |
) |
||||||
| Prepaid expenses and other current assets |
( |
) |
||||||
| Right-of-use assets |
||||||||
| Accounts payable and accrued expenses |
( |
) |
||||||
| Deferred revenues |
||||||||
| Operating lease liabilities |
( |
) |
( |
) |
||||
| Net cash provided by (used in) operating activities |
( |
) |
||||||
| Cash Flows from Investing Activities: |
||||||||
| Capital expenditures |
( |
) |
( |
) |
||||
| Net cash used in investing activities |
( |
) |
( |
) |
||||
| Cash Flows from Financing Activities: |
||||||||
| Proceeds from issuance of equity |
||||||||
| Repayment of long-term debt |
( |
) |
||||||
| Repurchase of stock |
( |
) |
( |
) |
||||
| Net cash used in financing activities |
( |
) |
( |
) |
||||
| Net increase (decrease) in cash and cash equivalents |
|
( |
) |
|||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for taxes |
$ | $ | ||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Notes to Consolidated Statements
(unaudited)
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, facilities management and IT procurement services. Our corporate offices and our integration facility are located in Round Rock, Texas.
The accompanying consolidated balance sheet as of December 31, 2021, 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 (“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 and cash flows. These interim consolidated 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, 2021.
Going Concern and Liquidity
As of March 31, 2022, the Company had an accumulated deficit of $
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have a significant backlog of projects which have been delayed due to COVID-19 and the related supply chain constraints. During the first quarter of 2022 we have seen revenues returning and supply chain improvements allowing for fulfilment of orders in our facilities and reseller businesses. We expect to be able to fulfill a large portion of our existing backlog across multiple lines of business during the remainder of 2022 based on expected delivery of products and component parts as indicated by suppliers and vendors. As a result, management has concluded that substantial doubt about the Company’s ability to continue as a going concern is alleviated. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time.
Revenue Recognition
We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative standalone selling prices.
Maintenance Services
We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. Our contract terms are typically one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services on a ratable basis over the contract term. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment, however our history of non-payments and bad debt expense has been insignificant.
Integration Services
We generate integration services revenues from fees that provide our customers with customized system and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods. We typically extend credit terms to our integration customers based on their credit worthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-60 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ credit worthiness. As of March 31, 2022 and December 31, 2021, our allowance for doubtful accounts was
Equipment Sales
We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods. Typically, we do not receive advance payments for equipment sales; however, if we do, we record the advance payment as deferred revenues. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment sales are typically due within 30-45 days of invoicing.
Deployment and Other Services
We generate revenues from fees we charge our customers for other services, including repairs or other services not covered under maintenance contracts, installation and servicing of equipment, including modular data centers that we sold, and other fixed-price services, including repair, design and project management services. In some cases, we arrange for a third party to perform warranty and servicing of equipment, and in these instances, we recognize revenue as the amount of any fees or commissions that we expect to be entitled to receive. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional.
Procurement Services
We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our reseller services revenue upon completion of the procurement activity, including transfer of control to the customer. In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided to our customers by another party and we have no control of the goods before they are transferred to the customer. In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commissions that we expect to be entitled to after paying the other party for the goods or services provided to the customer. Accounts receivable from our reseller activities are typically due within 30-60 days of invoicing.
Judgments
We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.
Sales Taxes
Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.
Shipping and Handling Costs
Costs for shipping and handling activities, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of revenues and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has transferred to the customer.
The following table shows our revenues disaggregated by reportable segment and by product or service type (in ’000’s, unaudited):
| Three-Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| FACILITIES: | ||||||||
| Maintenance revenues | $ | $ | ||||||
| Equipment sales | ||||||||
| Deployment and other services | ||||||||
| Total Facilities revenues | $ | $ | ||||||
| SYSTEMS INTEGRATION: | ||||||||
| Integration services | $ | $ | ||||||
| Reseller services | ||||||||
| Total Systems Integration revenues | $ | $ | ||||||
| TOTAL REVENUES | $ | $ | ||||||
Remaining Performance Obligations
Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of one year or less, we have elected the practical expedient applicable to such contracts and we do not disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of March 31, 2022, deferred revenue of $
Concentration of Credit Risk
We are currently economically dependent upon our relationship with a large US-based IT OEM. If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it would significantly reduce our revenue.
The following customer accounted for a significant percentage of our revenues for the periods shown (unaudited):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| US-based IT OEM | % | % | ||||||
No other customers represented more than 10% of our revenues for any periods presented. Our US-based IT OEM customer represented
Non-recourse factoring
We have entered into a factoring agreement with a financial institution to sell certain of our accounts receivables from a US-based IT 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 a sale of the receivables. 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 $
Recent Accounting Guidance
Recently Issued Accounting Pronouncements
In June 2016, FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets. Among the provisions of ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need only consider past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with the consolidated financial statements we issue for the year ending December 31, 2023, and the quarterly periods during that year. We are currently evaluating the adoption date and the impact of the adoption of this guidance on our consolidated financial statements and disclosures.
In May 2019, FASB issued Accounting Standards Update 2019-15, Financial Instruments – Credit Losses (Topic 326), (AASU 2019-15”). ASU 2019-15 provides guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit loss standard to measure financial assets at amortized cost (except held-to-maturity securities) using the fair value option. The effective date and transition methodology are the same as in ASU 2016-13.
Note 2 – Supplemental Balance Sheet Information
Receivables
Contract and other receivables consisted of the following (in ‘000’s):
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| Contract and other receivables | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Contracts and other receivables, net | $ | $ | ||||||
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:
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Reseller inventories | ||||||||
| Reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
Goodwill and Intangible Assets, Net
Goodwill and intangible assets, net consisted of the following (in ‘000’s):
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||
| Goodwill | $ | - | $ | - | ||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Acquired software | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Goodwill attributable to reporting units (in ‘000’s):
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| Facilities unit | $ | $ | ||||||
| Systems Integration unit | ||||||||
| Total | $ | $ | ||||||
At March 31, 2022 and December 31, 2021, both the facilities unit and the systems integration unit had negative carrying amounts on our records.
We recognized amortization expense related to intangibles of approximately $
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, we will evaluate goodwill and other long-lived intangible assets for impairment. We performed a quantitative analysis of our goodwill and intangibles at December 31, 2021 as part of our annual testing for impairment and concluded that there was no impairment. We considered relevant matters, including macroeconomic conditions and the effects of COVID-19 on our operations, and there was identified material triggering events or circumstances that occurred during the three -month periods ended March 31, 2022 or 2021 that indicated the carrying value of our goodwill and other long-lived intangible assets was impaired.
Property and Equipment
Property and equipment consisted of the following (in ’000’s):
|
Estimated Useful Lives (years) | March 31, 2022 (unaudited) | December 31, 2021 | ||||||||||||
| Trade equipment | $ | $ | ||||||||||||
| Leasehold improvements | - | |||||||||||||
| Furniture and fixtures | ||||||||||||||
| Computer equipment and software | ||||||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||||||
| Property and equipment, net | $ | $ | ||||||||||||
Depreciation of property and equipment and amortization of leasehold improvements and software totaled $
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in ’000’s):
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Legal Settlement | ||||||||
| Accrued expenses | ||||||||
| Compensation, benefits & related taxes | ||||||||
| Other accrued expenses | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
Note 3 – Long-Term Borrowings
Long-term borrowings consisted of the following (in ’000’s):
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| Notes Payable due July 2022 | $ | $ | ||||||
| Accrued in-kind interest – long term | ||||||||
| Less unamortized discount and debt issuance costs | ( | ) | ( | ) | ||||
| Current portion of long-term borrowing | ||||||||
| Non-current portion of long-term borrowing | $ | $ | ||||||
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 $
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 $
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
On July 19, 2017, we borrowed an additional $
The obligations under the loan to MHW and MHW Partners are secured by substantially all of the Company’s assets pursuant to the terms of a security agreement.
In conjunction with entering into the loan with MHW Partners, we entered into a warrant granting MHW Partners the right to purchase up to
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 warrant.
Note 4- Leasing Arrangements
We have operating leases for our office and integration facilities as well as for certain equipment and vehicles. Our leases have remaining lease terms of
We determine if an arrangement is a lease at inception. Operating leases are included in lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our consolidated balance sheet. We have elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. We also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, we did not need to reassess whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.
Right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight- line basis over the lease term. Components of lease expense and other information is as follows (in ‘000’s):
| Three Months Ended March 31, (unaudited) | ||||||||
| 2022 | 2021 | |||||||
| Lease expense | ||||||||
| Operating lease cost | $ | $ | ||||||
| Variable lease cost | ||||||||
| Sublease income | ( | ) | ||||||
| Total operating lease cost | ||||||||
| Operating Lease – operating cash flows | ( | ) | ( | ) | ||||
| New right-of-use assets – operating leases | ||||||||
The following presents information regarding the Company's operating leases as of March 31:
| 2022 | 2021 | |||||||
| Weighted average remaining lease term – operating leases (months) | ||||||||
| Weighted average discount rate – operating leases | % | % | ||||||
Future minimum lease payments under non-cancellable leases as of March 31, 2022 were as follows (in ‘000’s):
| Fiscal Year | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum future lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ | |||
| Reported as of March 31, 2022 | ||||
| Current portion of lease liability | $ | |||
| Non-current portion of lease liability | ||||
| $ | ||||
Note 5 - Net Loss Per-Share
Basic and diluted 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 (loss) 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 net income (loss). In the table below, net income (loss) represents the numerator and shares represents the denominator (in thousands except per share amounts; unaudited).
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Basic & diluted net loss per share: | ||||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted-average shares of common stock outstanding | ||||||||
| Basic net loss per share | $ | ( | ) | $ | ( | ) | ||
For the three-month periods ended March 31, 2022 and 2021, potentially dilutive shares of
Note 6 – Related Party Transactions
We had the following related party balances that are included in long-term borrowings (in ’000’s):
| Name of related party | March 31, 2022 (unaudited) | December 31, 2021 | ||||||||
| MHW | Promissory notes payable | $ | $ | |||||||
| Discount on notes payable | ( | ) | ( | ) | ||||||
| Accrued interest outstanding | ||||||||||
| MHW Partners | Promissory notes payable | $ | $ | |||||||
| Discount on notes payable | ( | ) | ( | ) | ||||||
| Accrued interest outstanding | ||||||||||
| Related party transactions: (in ’000’s) | Three Months Ended March 31, | |||||||
| 2022 | 2021 | |||||||
| Interest expense: | ||||||||
| MHW | $ | $ | ||||||
| MHW Partners | ||||||||
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.
Note 7 - 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 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, and also includes our reseller services where we procure equipment to be used in our integration activities. All 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 income (loss) for the three-month periods ended March 31, 2022 and 2021 and other segment-related information is as follows (in ‘000’s, unaudited):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Facilities | $ | $ | ||||||
| Systems integration services | ||||||||
| Total revenues | $ | $ | ||||||
| Depreciation and amortization expense: | ||||||||
| Facilities | $ | $ | ||||||
| Systems integration services | ||||||||
| Consolidated depreciation expense | $ | $ | ||||||
| Income (loss) from operations: | ||||||||
| Facilities | $ | $ | ( | ) | ||||
| Systems integration services | ( | ) | ( | ) | ||||
| Total income (loss) from operations | $ | ( | ) | $ | ( | ) | ||
| Interest expense, net: | ||||||||
| Facilities | $ | $ | ||||||
| Systems integration services | ||||||||
| Consolidated interest expense, net | $ | $ | ||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Total Assets: | ||||||||
| Facilities | $ | $ | ||||||
| Systems integration services | ||||||||
| Other consolidated activities | ||||||||
| Total | $ | $ | ||||||
Other consolidated activities include assets not specifically attributable to each business segment including cash and cash equivalents, prepaid expenses and other assets that are managed at a corporate level.
Note 8 – Subsequent Events
On May 13, 2022, we entered into a new revolving line of credit (the “credit facility”) with Susser Bank, National Association (“Lender”) pursuant to a Business Loan Agreement (Asset Based) (the “Loan Agreement”) dated effective May 5, 2022. The obligations under the credit facility are secured by substantially all of our accounts receivable. Our wholly owned subsidiaries, Vortech LLC, and VTC, L.L.C. jointly and severally guarantee our obligations under the credit facility.
The maximum amount of the credit facility is $
The credit facility requires that we maintain a minimum liquidity of $
The Loan Agreement and ancillary documents include customary affirmative covenants for secured transactions of this type, including maintaining adequate books and records, periodic financial reporting, compliance with laws, maintenance of insurance, maintenance of assets, timely payment of taxes, and notices of adverse events. The Loan Agreement and ancillary documents include customary negative covenants, including incurrence of other indebtedness, mergers, consolidations and transfers of assets and liens on our assets. The Loan Agreement and ancillary documents also include customary events of default, including payment defaults, failure to perform or observe terms, covenants or agreements included in the Loan Agreement and ancillary documents, insolvency and bankruptcy defaults, judgment defaults, material adverse chance defaults, and change of ownership defaults.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2021 included in our 2021 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2021 Annual Report on Form 10-K for a discussion of items that may affect our future results.
Overview
TSS, Inc. (‘‘TSS’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’) provides comprehensive services for the planning, design, deployment, maintenance, and refurbishment 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 include technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement and reseller services. Our headquarters and our integration facility are in Round Rock, Texas.
Our business is concentrated on the data center infrastructure and services market. This market continues to be highly competitive as commerce moves to cloud-based solutions and as data storage requirements continue to escalate for many industries. These underlying macroeconomic trends are continuing to drive demand for more information technology equipment and more efficient data center design and operation, resulting in continued growth in this market. We compete against many larger competitors who have greater resources than we do, which may affect our competitiveness in the market. We rely on several large customers to win contracts and to provide business to us under ‘‘Master Service Agreements’’, and the loss of such customers or a material decline in volume from such customers would have a material negative effect on our results.
Almost all of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers, thus our revenue reflects only the services we perform and the consigned components are not reflected in our balance sheet. We also offer our customers the ability to procure third-party hardware, software and services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction. These procurement and reseller services allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher profits on integration projects by broadening our revenue and customer base.
In March 2020, the coronavirus disease 2019 ("COVID-19") was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government. The pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.
The COVID-19 pandemic had both an immediate and an ongoing impact on our operations in both our facilities segment and our systems integration segment since it began. Travel restrictions and other customer-actions that restricted physical access to customer sites negatively impacted our facilities segment because we were unable to access customer locations to provide our services. We have also witnessed supply-chain disruptions beginning in the second half of 2021 and continuing into this most recent quarter that have delayed the delivery of equipment needed for both integration and for deployments, further delaying customer projects. Overall, these travel restrictions and supply chain challenges have directly impacted our operating results including our most recent quarter. Additionally, as our customers deferred or cancelled the deployment of new modular data centers (MDCs) in 2021 they instead maintained and updated their existing MDCs. We began to see an increase in the level of MDC deployments during the first quarter of 2022 which helped our total facilities revenues grow by 32% compared to the first quarter of 2021. We anticipate the level of MDC deployments will continue to increase throughout the remainder of 2022 as these site restrictions continue to be relaxed and supply chain constraints start to improve.
Our systems integration business has also seen a revenue decline because of the pandemic and has been negatively impacted due to logistical and supply-chain issues that have continued to affect component supply to us. Safety and other measures that we had to implement in our systems integration facility so that we could continue to operate safely despite the pandemic materially increased the cost of operating and providing our integration services, particularly at the onset of the pandemic. As time has passed and with knowledge gained, we have been able to significantly reduce these incremental operating costs. The supply-chain disruptions have prevented our customers from providing product to us for use in our integration business, preventing us from providing our services, and negatively impacting our revenue.
At this point we do not know how long this pandemic and its associated impact on our business will continue, or if it will worsen or improve. To the extent these travel restrictions and customer delays continue, the pandemic worsens, or we have further supply chain challenges, our business will continue to be negatively impacted.
RESULTS OF OPERATIONS
Revenue
Revenue consists of fees earned from the planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenue from providing system configuration and integration services, including procurement and reseller services, to IT equipment vendors. Currently we derive all our revenue from the U.S. market.
We contract with our customers under five primary contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements, and thus yield lower profit margins than time-and-materials and fixed-price arrangements which generate higher profit margins generally, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter into comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.
Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability.
We have been concentrating our sales efforts towards maintenance and integration services where we have traditionally earned higher margins. Historically we performed design and project-management services in a concentrated number of high-value contracts for the construction of new data centers. In addition to contributing to large quarterly fluctuations in revenue depending upon project timing, these projects required higher levels of working capital and generated lower margins than our maintenance and integration services. We re-focused our design and project management services towards smaller scaled jobs typically connected with addition/move/retrofit activities rather than new construction, to obtain better margins. We have also focused on providing maintenance services for modular data center applications as this market continues to expand. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding services such as procurement and reseller services, to help drive volume through the integration facility.
Revenues for the three-month period ended March 31, 2022 increased by $22,000 compared to the first quarter of 2021.The mix of revenue differed from 2021, and our reseller and procurement revenues decreased by $0.5 million or 22% in the first quarter of 2022 compared to the first quarter of 2021. However, this decrease was offset by an increase of $0.5 million, or 32%, in revenues in our facilities segment driven by an increase in deployments of new modular data centers. Revenues from new deployments grew by 216% compared to the first quarter of 2021. Our system integration revenues were $55,000 or 4% lower in the first quarter of 2022 compared to the first quarter of 2021.
We continue to experience supply-chain constraints that prevent our partners and customers from delivering all of the products needed for us to complete and perform integration services. This causes delays in the timing of systems integration revenue for us, and our backlog of outstanding orders continues to grow. Our vendors and partners expect these supply-chain issues to continue until later in the year.
Our reseller and procurement revenues involve us procuring third-party hardware, software and services on our customers’ behalf that are then typically used in our integrated services as we integrate those components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer. During the first quarter of 2022 we had more agent-type transactions, so although our total revenues from reseller and procurement services decreased compared to the first quarter of 2021, the gross profits from this business actually increased by approximately $0.1 million.
Cost of Revenue
Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expense, equipment and other costs associated with our test and integration facilities, excluding depreciation of our manufacturing property and equipment, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. The cost of revenue as a percentage of revenue was 68% for the three-month period ended March 31, 2022 compared to 75% for the first quarter of 2021. This decrease from the first quarter of 2021 reflects the lower proportion of procurement and reseller revenues to total revenues in this current quarter compared to a year ago. We earn much lower margins on product purchase/resell services, unless we are acting as an agent in the transaction, than we do with our traditional integration and maintenance services. As the percentage of our total revenue derived from reseller services decreases, we would anticipate that cost of revenue as a percentage of sales will decrease. Absent the reseller business, the profit margin from our core integration and maintenance services was 40% in the first quarter of 2022 compared to 41% in the first quarter of 2021.
As our reseller business is relatively new, the level of expected revenue from our reseller services has and will continue to fluctuate significantly on a quarterly basis. As a result, our cost of revenue as a percentage of total revenue will also fluctuate significantly. Cost of revenue for reseller services is higher than cost of revenue for our integration and maintenance services.
Since we earn higher profits when using our own labor services, we expect gross margins to improve when our labor services mix increases relative to the use of subcontracted labor or third-party labor. Our direct labor costs are relatively fixed in the short-term, and the utilization of direct labor is critical to maximizing our profitability. As we continue to bid and win contracts that require specialized skills that we do not possess, we would expect to have more third-party subcontracted labor to help us fulfill those contracts. In addition, we can face hiring challenges in internally staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead improves our overall profitability by increasing income, broadening our revenue base and generating a favorable return on invested capital. As we increase the level of IT reseller services in the future, we anticipate that our overall gross margin will decrease as the normal margins on reseller activities are lower than the margins from our traditional facilities and systems integration services.
A large portion of our revenue is derived from fixed price contracts. Under these contracts, we set the price of our services and assume the risk that the costs associated with our performance may be greater than we anticipated. Our profitability is therefore dependent upon our ability to estimate accurately the costs associated with our services. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid on the contract, and higher than expected costs of materials and labor. Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity.
Gross Profit
Our gross profit margin for the three-month period ended March 31, 2022 was 32% compared to a gross profit margin of 25% in the first quarter of 2021. This increase in margin as a percentage of revenues compared to the first quarter of 2021 was primarily attributable to the decrease in our level of procurement and reseller revenues, where we earn much lower margins on product purchase/resell services, unless we are acting as an agent in the transaction, than what we earn from our core integration and maintenance activities. Lower procurement and reseller revenues in 2022 decreased our revenues compared to 2021, but because of the higher level of MDC deployments in the first quarter of 2022, our overall gross profit improved by $0.3 million or by 25% to $1.6 million compared to the $1.3 million gross profit we recorded in the first quarter of 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of compensation and related expenses, including variable sales compensation, for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs. For the three-month period ended March 31, 2022, our selling, general and administrative expenses decreased by $46,000 or 3% compared to the first quarter of 2021 primarily due to lower compensation and professional fees.
Income (Loss) from Operations
For the three-month period ended March 31, 2022, we recorded an operating loss of $173,000. This compares to an operating loss of $607,000 that we had in the first quarter of 2021.
Net Income (Loss)
After net interest expense and income taxes we recorded a net loss of $308,000 or $(0.02) per share for the three-month period ended March 31, 2022. This compared to a net loss of $699,000 or $(0.04) per share for the first quarter of 2022.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity at March 31, 2022 are our cash and cash equivalents on hand, vendor trade-credit and projected cash flows from operating activities.
As of March 31, 2022, the Company had an accumulated deficit of $66.6 million, and a working capital deficit of $499,000, with notes payable of $2.0 million maturing in July 2022. In addition, the Company has generated recurring operating losses and fluctuating cash flows from operations which have been due, in part, to the effects of COVID-19 and related supply chain constraints. All of these conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management has evaluated the significance of these conditions in relation to its ability to meet its obligations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations, including the funds from our customer financing programs, and trade credit extended to us by our vendors. If future results do not meet expectations, management believes that we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that would take further steps such as the issuance of new equity or debt. We may also require additional capital if we seek to acquire additional businesses as a way to increase the scale of our operations, of there is a sudden increase in the level of reseller and procurement services. There can be no assurance as to the Company’s ability to scale its business operations or terms upon which additional financing may be available.
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have a significant backlog of projects which have been delayed due to COVID-19 and the related supply-chain constraints. During the first quarter of 2022 we executed on part of this backlog as well as significant new transactions, resulting in a rebound in the level of modular data center deployments, and we expect to be able to fulfil a large portion of our remaining backlog across our multiple lines of business over the next several quarters, based on expected delivery of products and component parts as indicated by suppliers and vendors. As a result, management has concluded that substantial doubt about the Company’s ability to continue as a going concern is alleviated.
If we continue to meet the cash flow projections in our current business plan, we expect that we will have adequate capital resources necessary to continue operating our business and meet our debt obligations for at least the next twelve months. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, there are potential risks, including that our revenues may not meet our projections, our costs may exceed our estimates, or our working capital needs may be greater than anticipated. 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 2022 and beyond or significantly affect our level of liquidity, which may limit our opportunities to grow our business.
At March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $12.8 million and $8.0 million, respectively.
Significant Uses of Cash
Operating Activities:
Cash provided by operating activities was $4.9 million for the three-month period ended March 31, 2022 compared to cash used in operating activities of $10 million for the three-month period ended March 31, 2021. This change was primarily attributable to the timing and financial impacts of our procurement and reseller services. At the end of calendar 2020 we were able to be paid by our customers for a number of large procurement projects, but we had yet to pay our vendors for these same projects. This drove an increase of $10 million in cash and accounts payable at the end of 2020. During the first quarter of 2021 we paid those vendors and both our cash balances and our accounts payable decreased by over $10 million, resulting in the decrease in our cash on hand compared to December 31, 2020 and resultant use of cash in operations during the first quarter of 2021. Due to the timing of upcoming reseller projects at the end of March 2022, we were able to be paid from customers but had yet to pay the vendors and suppliers for those project, causing our accounts payable and accrued expenses to increase by $4 million during the quarter. Our deferred costs on reseller projects consumed $1.3 million during the quarter which was offset by an increase in deferred revenues of $0.4 million and an increase in inventory of $0.6 million. We have been able to structure our procurement and reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities. However due to timing it is possible to see fluctuations on a quarterly basis for reseller contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit available to us to continue financing our reseller activities as we grow this business during 2022 and beyond.
Investing Activities:
Cash used in investing activities was $8,000 in the three-month period ended March 31, 2022 for the purchase of property and equipment compared to cash used in the same period of 2021 of $1,000 for purchases of property and equipment.
Financing Activities:
Cash used in financing activities was $23,000 for the three-month period ended March 31, 2022, compared to cash used in financing activities of $80,000 for the three-month period ended March 31, 2021. During the first quarter of 2022 we repaid capitalized interest on our notes payable of $20,000 and used $3,000 in the purchase of stock related to tax obligations around vesting of restricted stock by our employees. In 2021 we received $8,000 from the exercise of employee stock options and $88,000 was used in the first quarter of 2021 for the purchase of stock related to tax obligations around the option exercises.
Future Uses of Cash
Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues 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 expectations of cash usage during 2022 or beyond or significantly affect our level of liquidity, which may require us to take other measures to reduce our operating costs 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.
Our primary liquidity and capital requirements are to fund working capital from current operations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations including the funds from our customer financing programs. We believe that if future results do not meet expectations, we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that we could take further steps such as the issuance of new equity or debt. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses as a way to increase the scale of our operations.
Off-Balance Sheet Arrangements
As of March 31, 2022 and December 31, 2021, we had no off -balance sheet arrangements.
Critical Accounting Policies and Pronouncements
There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2021 with the exception of the adoption and evaluation of the adoption date and the impact of the adoption of recently issued accounting pronouncement guidance on our consolidated financial statements and disclosures. See also Item 1. Financial Statements Note 1 – Significant Accounting Policies regarding Recent Accounting Pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Our management performed an evaluation under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of March 31, 2022. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were effective such that information relating to the Company (including its combined subsidiaries) required to be disclosed in the Company’s SEC reports (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding financial disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting for the three-month period ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act of 1934, as amended.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In January 2022 we reached a settlement agreement with a third party relating to litigation that commenced in 2016 emanating from our construction business which we had discontinued at the end of 2016. The lawsuit related to the quality of equipment purchased from third parties on behalf of our customer and installed in a data center expansion project. In 2016, the Company accrued $50,000 which represented our deductible under our insurance policy as the potential exposure over the deductible was unknown. Under the settlement agreement, we agreed to pay the third party $500,000 in full settlement of all claims. $450,000 of this amount was covered by the Company’s insurance policies. The settlement was a recognized subsequent event to fiscal 2021 in accordance with FASB ASC855, Subsequent Events. Accordingly, as at December 31, 2021, we recorded an additional settlement liability of $450,000 reported in Accounts payable and accrued expenses, and a corresponding insurance recovery receivable of $450,000 that was reported in Prepaid expenses and other current assets. The loss accrual and insurance recovery were offset within selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2021, resulting in a $0 impact in fiscal 2021. The settlement amount was paid in February 2022.
Aside from the above, currently we are not a party to any material litigation in any court, and management is not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. We currently believe that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth information about our purchases of outstanding shares of our common stock during the quarter ended March 31, 2022:
| Monthly Period During the Quarter Ended March 31, 2022 |
Total Shares Purchased |
Average Price paid per Share |
Total Shares Purchased as Part of Publicly Announced Plans |
Approximate Dollar Amount of Shares Yet To Be Purchased Under Plans |
||||||||||||
| Jan. 1, 2022 - Jan. 31, 2022 |
1,483 | $ | 0.47 | - | - | |||||||||||
| Feb.1, 2022 – Feb. 28, 2022 |
- | $ | - | |||||||||||||
| Mar. 1, 2022 – Mar, 31, 2022 |
3,657 | $ | 0.46 | - | - | |||||||||||
| Total |
5,140 | $ | 0.46 | |||||||||||||
(a) All of these shares were acquired from associates to satisfy tax withholding requirements upon the vesting of restricted stock.
Item 5. Other Information
On May 13, 2022, we entered into a new revolving line of credit (the “credit facility”) with Susser Bank, National Association (“Lender”) pursuant to a Business Loan Agreement (Asset Based) (the “Loan Agreement”) dated effective May 5, 2022. The obligations under the credit facility are secured by substantially all of our accounts receivable. Our wholly owned subsidiaries, Vortech LLC, and VTC, L.L.C. jointly and severally guarantee our obligations under the credit facility.
The maximum amount of the credit facility is $1,500,000. The credit facility is subject to a borrowing base of the lesser of $1,500,000 and 80% of eligible accounts receivables, subject to customary exclusions and limitations. Certain accounts receivables subject to a vendor payment program with a customer are excluded from the definition of eligible accounts receivables under the credit facility. Borrowings under the credit facility will bear interest based on the U.S. Prime Rate as published in the Money Rates section of The Wall Street Journal (effective rate of 4.00% per annum at the time we entered into the credit facility) and such interest rate shall not be less than 3.50% per annum. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the credit facility, we will pay a loan origination fee of 0.5%, payable in advance upon entering into the credit facility. The credit facility matures on May 5th, 2023.
The credit facility requires that we maintain a minimum liquidity of $1,500,000 at all times.
The Loan Agreement and ancillary documents include customary affirmative covenants for secured transactions of this type, including maintaining adequate books and records, periodic financial reporting, compliance with laws, maintenance of insurance, maintenance of assets, timely payment of taxes, and notices of adverse events. The Loan Agreement and ancillary documents include customary negative covenants, including incurrence of other indebtedness, mergers, consolidations and transfers of assets and liens on our assets. The Loan Agreement and ancillary documents also include customary events of default, including payment defaults, failure to perform or observe terms, covenants or agreements included in the Loan Agreement and ancillary documents, insolvency and bankruptcy defaults, judgment defaults, material adverse chance defaults, and change of ownership defaults.
Item 6. Exhibits.
| 10* | Business Loan Agreement (Asset Based) dated as of May 13, 2022, between TSS, Inc. and Susser Bank. |
| 31.1* |
|
| 31.2* |
|
| 32.1** |
|
| 32.2** |
| 101.INS * |
Inline XBRL Instance Document |
| 101.SCH * |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL * |
Inline XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF * |
Inline XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB * |
Inline XBRL Taxonomy Extension Label Linkbase |
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase |
| 104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
| * |
Filed herewith. |
| ** |
Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TSS, INC. |
||
| Date: May 16, 2022 |
By: |
/s/ Anthony Angelini |
| Anthony Angelini |
||
| President and Chief Executive Officer |
||
| (Principal Executive Officer) |
||
| By: |
/s/ John K. Penver |
|
| John K. Penver |
||
| Chief Financial Officer |
||
| (Principal Financial Officer) |
||
Exhibit 10.
BUSINESS LOAN AGREEMENT (ASSET BASED)
|
Principal |
Loan Date |
Maturity |
Loan No |
Call/Coll |
Account |
Officer |
Initials |
|
$1,500,000 |
05-05-2022 |
05-05-2023 |
40379 |
4A/23 |
TSS1268 |
*** |
|
|
References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. An item above containing “***” has been omitted due to text length limitations. |
|||||||
|
Borrower: |
TSS, Inc. |
Lender: |
SUSSER BANK |
|
110 E. Old Settlers Road |
3030 MATLOCK ROAD |
||
|
Round Rock, TX 78664-2666 |
SUITE 205 |
||
|
ARLINGTON, TX 76015 |
|||
|
(817) 460-8052 |
THIS BUSINESS LOAN AGREEMENT (ASSET BASED) dated May 5, 2022 is made and executed between TSS, Inc. (“Borrower”) and SUSSER BANK (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule to this Agreement. Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements, as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall eb and remain subject to the terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of May 5, 2022 and shall continue in full force and effect, until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorney’s fees, and other fees and charges, or until May 5, 2023.
ADVANCE AUTHORITY. The following person or persons are authorized, except as provided in this paragraph, to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender’s address shown above, written notice of revocation of such authority: Anthony Angelini, President of TSS, Inc., and John K. Penver. CFO of TSS, Inc.; WITHIN 24 HOURS OF WRITTEN REQUEST.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows:
Conditions Precedent to Each Advance. Monthly Borrowing Base Certificates will be required if outstanding balance exist.
Making Loan Advances. Advances under this credit facility, as well as directions for payments from Borrower’s accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower’s account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower’s receipt of any such statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require. Lender’s Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to the Lender:
Perfection of Security Interests. Borrower agrees to execute all documents perfecting Lender’s Security Interests and to take whatever actions are requested by Lender to perfect and continue Lender’s Security Interests in the Collateral. Upon request of the Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fac for the purpose of executing any documents necessary to perfect, or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of Lender’s security interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower’s Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower’s principal governance office or should Borrower merge or consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender’s representatives upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts (Receivables) are or will be located at company headquarters. The above is an accurate and completed list of all locations at which Borrower keeps or maintains business records concerning Borrower’s collateral.
Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and schedules of Eligible Accounts in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: With respect to Eligible Accounts, schedules shall be delivered Monthly within thirty (30) days. The entire balance of any Account of any single Account Debtor will be ineligible whenever the portion of the Account which has not been paid within ninety (90) days from the invoice date is in excess of 25.000% of the total amount outstanding on the Account.
Representations and Warranties Concerning Accounts. With respect to he Accounts, Borrower represents and warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time, and at Borrower’s expense to inspect, examine, and audit Borrower’s records and to confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:
Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 110 E. Old Settlers Road, Round Rock, TX 78664-2666. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization, or any change in Borrower’s name. Borrower shall do all things necessary to preserve, and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.
Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed names under which Borrower does business: None.
Authorization. Borrower’s execution, delivery and performance of this Agreement and all of the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.
Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.
Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b0 any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in accordance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and test as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify, defend and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses with Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous wasted or substance on the Collateral. The provisions o this section of the Agreement, including the obligation to indemnify and defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives, and assigns, and are legally enforceable in accordance with their respective terms.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:
Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis and permit Lender to examine and audit Borrower’s books and records at all reasonable times.
Financial Statements. Furnish Lender with the following:
Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.
Interim Statements. As soon as available, but in no event later than forty-five (45) days after the end of each fiscal quarter, Borrower’s balance sheet and profit and loss statement for the period ended, prepared by Borrower.
Tax Returns. As soon as available, but in no event later than 15 days after the applicable filing date for the tax reporting period ended, Borrower’s Federal and other governmental tax returns, prepared by Borrower.
Additional Requirements. A/R Aging. Borrower to provide Annual A/R Aging reports per advance request or monthly A/R Aging reports, if there is an outstanding balance, within ten (10) days from month end.
Field Exam. A field exam will be required at Lender’s discretion.
All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements, as Lender may request from time to time.
Additional Requirements. Minimum Liquidity Requirement. Borrower shall maintain at all times unencumbered liquidity (cash and marketable securities acceptable to Lender, excluding any assets that may not legally be encumbered, pledged or hypothecated) in an amount not less than $1,500,000.00, to be tested on an ongoing basis.
Depository Relationship. Establish and maintain its primary operating account (s) with Lender.
Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations in form, amounts, and coverages reasonably acceptable to Lender and by insurance companies authorized to transact business in Texas. BORROWER MAY FURNISH THE INSURANCE REQUIRED BY THIS AGREEMETN WHETHER THROUGH EXISTING POLICIES OWNED OR CONTROLLED BY BORROWER OR THROUGH EQUIVALENT COVERAGE FROM ANY INSURANCE COMPANY AUTHORIZED TO TRANSACT BUSINESS IN TEXAS. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantors named below, on Lender’s forms, and in the amounts and under the conditions set forth in those guaranties.
| Names of Guarantors | Amount |
| VTC, L.L.C. DBA TOTAL SITE SOLUTIONS | Unlimited |
| Vortech, L.L.C. | Unlimited |
Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claims so long as (1) the legality of the same shall be contested in good faith by appropriate proceedings, and (2) Borrower shall have established on Borrower’s books adequate reserves with respect to such contested assessment, tax, charge, levy, lien or claim in accordance with GAAP.
Performance. Perform and comply, in a timely manner, with all terms, conditions and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.
Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and managerial personnel; provide written notice to Lender of any change in executive and managerial personnel; conduct its business affairs in a reasonable and prudent manner.
Environmental Studies Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be required by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.
Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation or withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.
Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts and records and to make copies and memoranda of Borrower’s books, accounts and records. If Borrower nor or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.
Compliance Certificates. Unless waived in writing by Lender, provide Lender within thirty (30) days after the end of each month and at the time of each disbursement of Loan proceeds, with a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Events of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.
LENDERS EXPENDITURES. If Borrower fails for any reason to maintain any insurance as required in this Agreement, Lender may buy similar insurance protecting Lender’s interest only in the Collateral. All such expenditures paid by Lender for such purposes will then bear interest at the Note rate from the date paid by Lender to the date of repayment by Borrower. To the extent permitted by applicable law, all such expenses will become part of the Indebtedness and, at Lender’s option, will be payable on demand. If such insurance is sold for a premium not fixed or approved by the Sate Board of Insurance, Borrower will be so notified at the time of purchase thereof. Borrower may cancel such insurance if Borrower provides substitute equivalent coverage from a company authorized to transact business in Texas.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:
Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.
Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge or restructure as a legal entity (whether by division or otherwise), consolidate with or acquire any other entity, change its name, convert to another type of entity or redomesticate, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.
Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money, or assets to any other person, enterprise or entity, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.
Agreements. Enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s obligations under this Agreement or in connection herewith.
CESSAION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or Guarantor has with Lender, (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.
DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:
Payment Default. Borrower fails to make any payment when due under the Loan.
Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.
Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or become false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.
Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) ant any time and for any reason.
Creditor of Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occur with respect to any Guarantor of any of the Indebtedness or any Guarantor dies, becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtednes.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.
Insecurity. Lender in good faith believes itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s rig to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.
Attorneys’ Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit, including Lender’s reasonable attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower shall also pay all court costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interest. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligations under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.
Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Texas without regard to its conflict of law provisions. This Agreement has been accepted by Lender in the State of Texas.
Choice of Venue. If there is a lawsuit, and if the transaction evidenced by this Agreement occurred in TARRANT County, Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of TARRANT County, State of Texas.
No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.
Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.
Payment of Interest and Fees. Notwithstanding any other provisions of this Agreement or an provision of any Related Document, Borrower does not agree or intend to pay, and Lender does not agree or intend to charge, collect, take, reserve or receive (collectively referred herein as “charge” or “collect”), any amount in the nature of interest or in the nature of a fee for the Loan which would in any way or event (including demand, prepayment, or acceleration) cause Lender to contract for, charge or collect more for the Loan than the maximum Lender would be permitted to charge or collect by any applicable federal or Texas state law. Any such excess interest or unauthorized fee will, instead of anything stated to the contrary, be applied first to reduce the unpaid principal balance of the Loan, and when the principal has been paid in full, be refunded to Borrower.
Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.
Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries of affiliates.
Successors and Assigns. All covenants and agreements by or behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.
Survival of Representations and Warranties. Borrower understand and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.
Time is of the Essence. Time is of the essence in the performance of this Agreement.
Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.
DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting word and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:
Account. The word “Account” means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third part grantor acceptable to Lender).
Account Debtor. The words “Account Debtor” mean the person or entity obligated upon an Account.
Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf under the terms and conditions of this Agreement.
Agreement. The word “Agreement” means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time.
Borrower. The word “Borrower” means TSS, Inc. and includes all co-signers and co-makers signing the Note and all their successors and assigns.
Borrowing Base. The words “Borrowing Base” mean, as determined by Lender from time to time, the lesser of (1) $1,500,000.00 or (2) 80% of the aggregate amount of Eligible Accounts.
Business Day. The words “Business Day” mean a day on which commercial banks are open in the State of Texas.
Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement.
Eligible Accounts. The words “Eligible Accounts” mean at any time, all of Borrower’s Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Accounts against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include:
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(1) |
Accounts with respect to which the Account Debtor is employee or agent of Borrower. |
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(2) |
Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers or directors. |
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(3) |
Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. |
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(4) |
Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. |
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(5) |
Accounts which are subject to dispute, counterclaim, or setoff. |
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(6) |
Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. |
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(7) |
Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. |
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(8) |
Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. |
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(9) |
Accounts which have not been paid in full within ninety (90) days from the invoice date. |
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(10) |
The entire balance of any Account of any single Account Debtor will be ineligible whenever the portion of the Account which has not been paid within ninety (90) days for the invoice date is in excess of 25.000% of the total amount outstanding on the Account. |
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(11) |
All contracts and affiliated accounts |
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(12) |
All accounts receivable related to Dell Technologies, Inc. There is a financing agreement in place against Dell receivables at with Citi Bank. |
Environmental Laws. The words “Environmental Laws” mean any all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et. Seq. (”CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery act, 42 U.S.C. Section 6901, et. Seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.
Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.
Expiration Date. The words “Expiration Date” mean the date of termination of Lender’s commitment to lend under this Agreement.
GAAP. The word “GAAP” means generally accepted accounting principles.
Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.
Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.
Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.
Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported, or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.
Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.
Lender. The word “Lender” means SUSSER BANK, its successors and assigns.
Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.
Note. The word “Note” means the Note dated May 5, 2022 and executed by TSS, Inc. in the principal amount of $1,500,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.
Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousement, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interest upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of the Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.
Primary Credit Facility. The words “Primary Credit Facility” mean the credit facility described in the Line of Credit section of this Agreement.
Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.
Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.
Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract or otherwise.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED MAY 5, 2022.
BORROWER:
TSS, INC.
| By. /s/ Anthony Angeline | By: /s/ John K. Penver |
| President, Chief Executive Officer | Chief Financial Officer of TSS, Inc. |
| & Secretary of TSS, Inc. |
LENDER:
SUSSER BANK
By: /s/ Mark Metcalfe, Executive Vice President
Exhibit 31.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002
I, Anthony Angelini, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TSS, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 16, 2022 |
By: |
/s/ Anthony Angelini |
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Anthony Angelini |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002
I, John K. Penver, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TSS, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 16, 2022 |
By: |
/s/ John K. Penver |
|
John K. Penver |
||
|
Chief Financial Officer |
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| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (the “Report”) of TSS, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Angelini, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
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Date: May 16, 2022 |
By: |
/s/ Anthony Angelini |
|
Anthony Angelini |
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|
President and Chief Executive Officer |
||
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(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (the “Report”) of TSS, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John K. Penver, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
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Date: May 16, 2022 |
By: |
/s/ John K. Penver |
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John K. Penver |
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|
Chief Financial Officer |
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(Principal Financial Officer) |