TSS, Inc 10-K for FY2023
TSS, Inc. (TSSI)
About this 10-K
TSS, Inc filed this 10-K on March 29, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $54.4M
- up 77.6% from $30.64M a year earlier
- Net income
- $74K
- compared with a net loss of $73K a year earlier
- Diluted EPS
- $0.00
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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of incorporation or organization) |
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Registrant’s telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
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 preceding 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 the 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.:
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of June 30, 2023, the aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant was approximately $
Number of shares of Common Stock outstanding as of March 30, 2024:
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Definitive Proxy Statement, relating to our 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the 2023 fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.
TSS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2023
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“SAFE HARBOR” STATEMENT |
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PART I |
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Item 1. |
Business |
1 |
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Item 1A. |
Risk Factors |
6 |
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Item 1B. |
Unresolved Staff Comments |
11 |
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Item IC. |
Cybersecurity |
11 |
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Item 2. |
Properties |
11 |
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Item 3. |
Legal Proceedings |
11 |
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Item 4. |
Mine Safety Disclosures |
11 |
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PART II |
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
12 |
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Item 6. |
Selected Financial Data |
13 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operation |
14 |
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Item 7A. |
Quantitative and Qualitative Disclosures about Market Risk |
23 |
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Item 8. |
Financial Statements and Supplementary Data |
24 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
Controls and Procedures |
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Item 9B. |
Other Information |
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PART III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
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Item 11. |
Executive Compensation |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
45 |
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Item 13. |
Certain Relationships and Related Transactions and Director Independence |
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Item 14. |
Principal Accounting Fees and Services |
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PART IV |
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Item 15. |
Exhibits, Financial Statement Schedules |
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Item 16. |
Form 10-K summary |
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“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 Annual Report on Form 10-K (this “Annual Report”), as well as those made in other filings with the SEC.
Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “anticipates,” “expects,” “may,” “will,” “continue,” “forecast,” “foresee” or other similar words. Such forward-looking statements are based on our 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 Item 1A of this Annual Report.
We expressly disclaim any obligation to release publicly any updates or changes in our expectations or any changes in events, conditions, or circumstances on which any forward-looking statement is based.
As used herein, expect as otherwise indicated by the context, the terms “TSS,” “Company,” “we”, “us” and “our” are used to refer to TSS, Inc. and our wholly-owned subsidiaries.
PART I.
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Item 1. |
Business |
Company Overview
TSS, Inc. provides a broad and specialized range of integration technology services that enable enterprises and users to successfully implement, operate, and maintain their Information Technology systems. As a provider of technology services built on a platform of experienced program management, we have expertise in delivering complex, end-to-end IT technology solutions cost-effectively. These IT solutions can be deployed in various physical settings such as data centers, co-location facilities, server rooms, modular or edge-based solutions, security operations, and communications facilities. Our services include rack and systems integration, configuration services, data center and modular data center facility management integration, deployment and maintenance services, strategic procurement services, project management and technology consulting, and design and engineering services.
TSS was incorporated in Delaware in December 2004. Our headquarters and our systems integration and configuration services facility are located in Round Rock, Texas.
We support a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDC), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more computing and storage capacity. In 2023 these enterprises shifted their investment priorities towards artificial intelligence (AI) and accelerated computing infrastructure initiatives. Enterprises and data center operators face immense pressure to integrate and deploy the latest AI equipment and graphic processing units (GPUs). They must adopt these next-generation servers and custom rack-scale architectures to compete in the market successfully and quickly. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.
Over the last ten years, we have focused our business on providing world-class integration services to our customer base. As computing technologies evolve, and as we currently see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our rack and systems integration businesses to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM customer to win contracts and to provide business to us under “Master Service Agreements”. The loss of this customer could have a material negative effect on our results. Our operational focus is to ensure this doesn’t happen.
Most 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 revenues reflect only the services we perform, and the consigned components are not reflected in our balance sheet. We also offer our customers strategic procurement services whereby we procure third-party hardware, software, and services on their behalf. Our configuration and integration service businesses integrate these components to deliver a complete system to our customers.
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. However, we have no control over 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 activities allow us to develop relationships with new hardware, software, and professional service providers and allow us to generate higher margins on integration projects by broadening our revenue and customer base.
Service Offerings
We have developed a unique set of solution offerings where we provide a range of services that enable our customers and partners to efficiently plan, develop, build, deploy, and maintain their IT hardware and software solutions. These solutions begin with strategies for the care of information technology assets that are housed in the facility or modular data centers, including power, cooling, and heat rejection, as well as disaster recovery backup systems. Our operating expenses are not exclusively aligned to each service offering, as shared resources such as sales, marketing, and general and administrative expenses support all services. Our solutions involve all aspects of the life cycle of both traditional and modular data centers and their related assets which are described in more detail below.
Systems Integration Services:
To assist our customers with ITequipment deployment in their data centers we provide what we call “systems integration” services. We provide integrated technology services and software tools designed to accelerate the assembly and delivery of complex information technology solutions. These services include custom configuration of a broad scope of information technology products including client products, enterprise products, clusters, and modular containers. The integration of this equipment at both a rack-level or facility or modular data center level is performed to our customer specifications and test criteria and may include imaging of software onto the hardware as well. We are generally not responsible for the performance of the related IT equipment in the field. In addition, we provide warehousing of high-value equipment such as servers, switches, and other information technology hardware that are generally provided on a consignment basis to us by our OEM and end-user customers.
We also provide second-touch configuration services for our OEM and end-user customers, such as adding software, hardware, or other features to end-user devices, bundling such devices with peripherals, pre-loading customer-determined application software, tagging, asset capture, and other fulfillment services.
We have added two new service offerings to assist customers with the ongoing management of their IT systems. These include services to move or relocate equipment between locations, and specialized cabling solutions to link or integrate rack-level products and customer cabling and labeling services.
Facilities Services:
Consulting:
During the initial phase of a data center project, we provide project development-related services that typically include establishing project goals and a preliminary budget and schedules, setting technical parameters and requirements, and determining project team members and the overall requirements of the team.
Design and engineering consulting services typically include critical power and mechanical load calculations, mechanical design and engineering, high and medium voltage electrical design and engineering, communications and security systems design and engineering, physical vulnerability assessments, force protection design and bomb blast analyses, fire protection system design and engineering, facility systems equipment selection and facility commissioning and testing. These offerings also include post-commissioning support for ongoing operations.
Our strategy is to increase the number of customers and modular data centers under contract so that we can increase the amount of recurring revenues from ongoing design, maintenance, and support contracts. Our mission-critical facilities experience and our personnel skills position us as trusted advisors to our customers and allow us to work on new opportunities as our customers grow or as their facilities mature and as partners introduce us to new client opportunities. We also intend to increase our efforts at establishing direct selling and business relationships within the market.
Deployment:
In connection with the deployment of a solution within a customer’s existing data center, modular data center or related equipment requirements, our capabilities include project management, value engineering and design management, bid negotiation support, subcontractor pre-qualification, and selection, long-lead equipment procurement, issuance of equipment and construction contracts, and refinement and management of project budgets and schedules. Our project managers mobilize the required expertise for the project, utilizing project superintendents, quality control and safety professionals, as well as qualified subcontractors and support personnel. Project managers supervise work by project team members, including subcontracted parties, including all aspects of the following: architecture and construction, electric power systems, heat rejection and cooling, energy management, and controls, cooling tower systems, security systems, voice, data and network cabling, fire and life safety systems, and process piping and plumbing systems. The project manager remains responsible for managing all aspects of the project until project completion and customer delivery.
In addition, this installation portion of a project has the largest number of outside influences that can impact project goals and objectives, such as weather, non-performance of subcontractors, equipment deliveries, unexpected project changes from the owner, and influence from local authorities and utility providers. Therefore, management experience, skill, and mission focus are critical during the project installation period.
Maintenance and management:
We provide a comprehensive maintenance and service offering designed to ensure that the multiple systems critical to sustaining online applications in enterprise data centers and modular data centers remain operational and functional. Typical facilities management services include overall management of the post-construction facility maintenance program, and on-site staffing of technical engineering positions (e.g., electricians, HVAC mechanics, control technicians, and voice/data technicians). Increasingly, data centers are being constructed in a modular format, whereby information technology, power, and other related assets are deployed in pre-integrated solutions. Modular data centers may have lower overall cost of delivery, lower energy consumption, and shorter deployment schedules compared to traditional data centers. Our on-site maintenance services provide additional project revenue for us and position us for involvement in any new facility planning, design, and construction initiatives that the customer undertakes.
In addition, we provide 24x7 network operations support from our Round Rock, Texas facility which has the capability of remotely monitoring our data center service contract customers’ facilities for systems operations and emergency events that could lead to outages. Temperature levels, humidity, electrical connectivity, power usage, and fire alarm conditions are among the items monitored. The system maintains all site documentation for repairs and maintenance performed on each critical piece of equipment covered under our services. The information is useful to our customers in assessing operational efficiency and causes of failure and enables them to make critical decisions on repair or replacement strategies based on the operating history of the monitored systems.
Our facilities maintenance service contracts can be tailored to customer requirements and typically span one to three years in duration with cancellation clauses for nonperformance and are typically billed annually in advance. Our service contracts take different forms including fixed-price equipment maintenance with an optional comprehensive warranty to fix failures in key components such as uninterruptible power supplies or batteries, ticket-based service provided at contracted rates in a master service agreement, comprehensive facility services agreements that include on-site staffing, scheduled equipment maintenance and nontechnical facility services, and direct job-specific contracts for additional moves, add, refresh, refurbishment and change work within a facility.
As computer density increases and data centers evolve into the use of modular form factors, we found that we could leverage our facilities' maintenance experience and infrastructure by offering maintenance services for modules being deployed into new data centers. The number of modular units under our service contracts has continued to expand. Our design services continue to evolve to support changing data center requirements including installation and maintenance of systems deployed on the edge. Ultimately, we started working with IT vendors to help them in the design and integration of their IT equipment into modular data centers, which typically leads to ongoing maintenance contracts as these modular systems deploy.
Strategic 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 used in our integration services as we integrate these components to deliver a completed system to our customers. These procurement services enable highly customizable solutions for our OEM and end-user customers and enable us to expand our revenues and profits and our customer base. We recognize our procurement services revenue upon completion of the procurement activity. In some cases, we arrange for the purchase of third-party hardware, software, or professional services that are to be provided directly 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 commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer.
Customers
Our customers include IT OEM equipment, technology and service companies, and private-sector businesses that in some cases are the end users of the facility, or in other cases are providing a facility to a government or commercial end user.
Sales and Marketing
A key part of our selling strategy is entering into master service agreements with multiple partners and co-selling our range of services to our partners’ end-user customers, leveraging their customer relationships and broadening the scope of potential customers for us. Our go-to-market approach formerly relied on business generated by one major OEM customer. While this business was and remains valued, it has been difficult to forecast resulting in inconsistent and fluctuating quarterly results. This approach relied on expertise in information technology hardware systems, energy consumption, real estate matters, and facilities planning and operation from this primary demand source. This marketing approach allowed the end–user customer to contract for comprehensive facilities services or to contract separately for each project phase such as integration or fulfillment services.
Our updated go-to-market strategy is designed to capitalize on our investment in direct selling personnel and leveraging our OEM partner’s capabilities at the same time. Our ability to be involved in sales engagements earlier in the cycle and with end-users will allow us to positively impact demand and provide greater visibility into the integration schedules and future pipeline. This impacts our ability to better manage personnel schedules and ultimately optimize our production capacity. We also seek to enhance our name recognition using improved web marketing, trade shows, technical seminars, direct mailings, and social media.
Our headcount in sales and marketing has been very selective and targeted to align the skill sets with our evolving service offerings, leverage partner relationships and increase the consultative capability of our sales organization.
Maintaining key alliances and creating new partnerships is an important part of our sales development and growth plan. These alliances reside with various information technology consulting firms, specialty mission-critical engineering firms, application service providers, and internet service providers. Key alliance opportunities also reside in other firms within the market sector such as equipment manufacturers, product suppliers, property management firms, developers, information technology system integrators, and firmware providers. We are focused on expanding our strategic alliances with information technology corporations to provide engineering, design, construction management services, systems integration, modular solutions, and facility management services. As we expand our configuration services business, we expect this will help us establish alliances with new hardware and software providers who operate in the IT infrastructure market.
Competition
The mission-critical information technology solutions market is large, fragmented, and highly competitive. We compete for contracts based on the strength of our customer relationships, successful past performance, significant technical expertise, specialized knowledge, and broad service offerings. Our strength lies in our ability to deliver quality solutions on time and with high quality at a competitive price. These solutions can be complex or simple. We have gained traction by providing complex AI solutions utilizing GPU and advanced thermal management technology. We often compete against channel re-sellers and divisions of large information technology service and equipment providers. In some cases, because of diverse requirements, we collaborate with these and other competitors for projects. We respect competition in the information technology services sector, and we embrace what we need to do to compete and win to continue to increase in the future.
Strategy
Our goal is to profitably grow our existing businesses and to identify expanded service offerings to further our value add to our customers as we become a recognized leader in the life-cycle management of complex IT solutions. At a high level, the strategy we intend to use to accomplish this goal include:
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Expand our ability to drive demand with direct and selling resources and to co-sell with our customers and partners. We believe we can expand our services portfolio penetration within these new, as well as existing customers. |
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Maintain intense customer focus: We intend to strengthen and deepen our customer relationships. We believe that continued focus on cost-effective systems integration, deployment, and ongoing life-cycle management is important, and will help to increase our net sales, operating performance, and market share. To accomplish this, we intend to continue our close collaboration with our OEM partner to assist them in identifying demand for our services and design new services that allow them to meet new customer requirements and leverage innovations and technical developments. Additionally, we will continue to expand our sales force and field service technicians and add additional technical expertise. |
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Continue to deliver operational excellence and cost competitiveness and enhance our manufacturing capability. A key element of our success is our ability to leverage and optimize our systems integration facility. We will continue to invest in our integration processes and technology to achieve additional cost efficiencies and enhance our existing capabilities. We are expanding to a hybrid integration model which allows us to generate revenues from within our facility and externally at customer locations. This allows more flexibility to support our customers’ requirements while continuing to enhance our cost-effectiveness. |
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Pursue selective strategic partnerships and acquisitions: As part of our strategy to expand our service offerings and to maximize our market opportunities, we may partner with or acquire technologies, services, or product lines to accelerate our growth and to enhance our portfolio. |
Employees
On December 31, 2023, we had 81 full-time employees. Our future success will depend on our continued ability to attract, retain, and motivate qualified personnel. We are not a party to any collective bargaining agreement, and we have not experienced any strikes or work stoppages. We consider our relationship with our employees to be very satisfactory.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements relating to our annual stockholders’ meeting with the Securities and Exchange Commission (“SEC”). Copies of these filings, including amendments to such filings are available, free of charge, on our website, www.totalsitesolutions.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website is not and should not be deemed to be a part of this Annual Report or a part of any other report or filing with the SEC. All reports that we file with the SEC are available to read and copy at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
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Item 1A. |
RISK FACTORS |
Our business involves a number of risks, some of which are beyond our control. The risks and uncertainties described below are not the only ones we face. Such factors could have a significant impact on our business, operating results and financial condition. We believe the most significant of these risks and uncertainties are as follows:
We derive a significant portion of our revenues from one customer.
We currently derive and believe that we will continue to derive in the near term a significant portion of our revenues from one OEM customer. We provide a range of different services and generate revenue from multiple business units and divisions of this OEM customer. To the extent that any significant business unit or division of this OEM customer uses less of our services or terminates its relationship with us, or this OEM reorganizes its business units and divisions in such a way that directly impacts the level of business with us, our revenues would decline significantly, which would have a material adverse effect on our financial condition and the results of our operations. Revenues from this OEM customer comprised 96% of our total revenues for each of the years ended December 31, 2023 and 2022.
Supply chain challenges have and will likely negatively affect our integration business by slowing the supply of parts needed to perform integration services, requiring us to hold greater quantities of inventory for longer periods and/or delaying completion of services for our customers.
Since the COVID 19 pandemic began in 2020, due to its impact on global production and distribution we have experienced ongoing impacts from shortages of components needed to complete integration and procurement services, delaying our ability to recognize revenue for these projects and negatively impacting our profitability. In addition to delaying our services, this has also resulted in us having to hold onto greater quantities of customer inventory for longer time periods while we wait for the missing components to be delivered. Due to our fixed storage capacity, holding customer-owned inventory for longer periods has negatively impacted our ability to perform other services and added cost and risk, including custodial risk, into our integration business. The supply chain disruptions have also directly impacted vendors and other third parties from whom we procure goods and services for our reseller and procurement business, causing delays in completing procurement services for our customers. This has the potential to materially harm our operating results by delaying recognition of revenue. This can also harm our liquidity position if we are forced to pay vendors for products and services before we have the ability to invoice and receive payment from our customers, which could also prevent us from performing additional procurement services for our customers or cause other liquidity concerns.
Changes in labor market conditions are causing increases in our labor costs, and if we are unable to adequately recover these costs from our customers, our business will be negatively impacted.
At times we experience higher levels of attrition, increasing compensation costs, and more intense competition for talent. We believe that our future success will be dependent upon retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur. As a small company we are particularly susceptible to negative impacts if critical and experienced personnel leave. Hiring and retaining qualified executives and other employees is therefore critical to our business. During 2022 and 2023 we had a number of changes to our executive leadership team, and we experienced increased wage pressure and challenges in hiring people in the Austin, Texas market. We have had to pay higher wages to attract new employees and retain our existing employees. If our total compensation programs, employment benefits, and overall workplace culture are not viewed as competitive and inclusive, our ability to attract, retain and motivate employees could be compromised. To the extent we experience significant attrition or the loss of critical employees and are unable to replace employees in a timely manner, we could experience a loss of critical skills and reduced employee morale, potentially resulting in business disruptions or increased expenses to address any disruptions. We have recently increased the prices we charge for our integration services to recover these higher costs. To the extent that we are unable to promptly pass higher labor costs on to our customers, our business will be negatively impacted. Our inability to attract, retain and motivate employees or manage succession of key roles may inhibit or ability to maintain or expand our business operations.
We have a history of operating losses, and we may experience net losses in the future.
Although we recorded operating income in 2023 and 2022 and net income in 2023, we had a net loss in 2022 and we recorded operating and net losses in both 2021 and 2020. We have a history of recurring net annual losses in prior years and at December 31, 2023 we had an accumulated deficit of approximately $66.3 million. We believe that changes we have made to the business in recent years, including the addition of procurement and reseller services and changes to our operating cost structure have improved our operating results and allowed us to achieve multiple profitable quarters in each of the last several years, but we do have a history of fluctuating operating results. Our efforts to align costs with sales and gross margin volume have reduced our level of overhead, but there can be no guarantee that we will be successful in sustaining or increasing profitability in 2024 or beyond. The uncertainty of a rapidly changing marketplace and ongoing global supply challenges have created a volatile and challenging business climate, which may continue to negatively impact our customers and their spending and investment decisions. We may not be able to generate the level of revenue necessary to achieve and maintain sustainable profitability. Any failure to maintain and grow our revenue volumes would adversely affect our business, financial condition and operating results.
We are attempting to diversify our customer base but there is no guarantee that we will be successful in doing so.
After the sale of certain components of our business in 2018 and 2017, our customer concentration increased and revenue from our three largest customers comprised 99% of our total revenues for each of the years ended December 31, 2023 and 2022. We are continuing our efforts to add new revenue streams such as our strategic procurement services that we began offering in 2019, as well as targeting other vendors in the data center infrastructure market, including Value Added Resellers and systems integrators who have the need for IT integration services. We are also targeting other vendors in the modular data center market to leverage our expertise and capabilities in this marketplace. We are also trying to stay ahead of emerging trends in the IT market space such as liquid-cooled product offerings, AI computing, immersion technology and edge-based solutions so that we can develop service offerings to leverage growth opportunities for these new markets. While we believe our efforts will allow us to broaden our customer base and reduce our customer concentration, there can be no guarantee that we will be successful at these endeavors, or of the time that it will take for these efforts to be successful.
We are partially through the implementation of a new enterprise resource IT system and have yet to fully deploy this new system across all of our business units. Any challenges, delays, difficulties, or errors during the implementation of this new system may negatively impact our business operation and harm our operating results.
We rely on computerized inventory and management systems to coordinate and manage the activities in our integration business, as well as to communicate inventory and shipment information to our vendors and customers. Our ability to rapidly process incoming deliveries, track inventory through the integration process, and process shipments in a timely manner are essential to the operations of our integration business. As we introduce a new ERP system to perform these functions including our financial reporting and accounting functions, any challenges in the implementation of the system, changes to processes or errors in functionality where such systems fail to adequately perform as designed, could adversely affect our business and harm our operating results. We began to use this new enterprise system as our system of record with effect from October 1, 2022. We are still working to deploy the system across all of our business units and integrate it into our financial reporting systems.
Our procurement services business is still evolving, and the level of this business may fluctuate significantly on a quarterly basis, requiring additional working capital in order to grow.
We began providing procurement services to our customers in 2019. We do not yet have a history of stable and ongoing contracts with customers for our procurement services and, as a result, we have experienced material fluctuations in our quarterly revenues from these services, which has had a material impact on our quarterly and annual revenues and profits. We have been able to structure our procurement 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, depending on the size of potential procurement and reseller contracts, we may be required to procure material amounts of hardware, software, and professional services from other third parties and there can be no guarantee that our existing sources of liquidity or available trade finance will be sufficient to enable us to finance these transactions.
As the age of modular data centers increases and customers look to shut or replace such units, our recurring maintenance revenues could be negatively impacted, and this could adversely affect our operating results.
Modular Data Centers (MDCs) typically have a lifespan of 6-10 years unless they are updated with new IT equipment. As they near the end of their useful life, customers can either perform maintenance to extend the MDCs' lifespan or terminate maintenance contracts for those MDCs. If customers terminate their annual maintenance contracts, it could negatively impact our maintenance revenues and profitability unless they replace the units with new MDCs immediately. While our history suggests that customers will replace MDCs with new modules subject to annual maintenance contracts, the time period between these two events could result in a decrease in our maintenance and overall revenue in our facilities business.
We have substantial amounts of goodwill, and changes in future business conditions could cause these assets to become impaired, requiring substantial write-downs that would adversely affect our operating results.
We have substantial amounts of goodwill resulting from prior acquisitions of businesses. Under generally accepted accounting principles, we do not amortize goodwill and intangible assets acquired in a purchase business combination that are determined to have indefinite useful lives, but instead review them annually (or more frequently if impairment indicators arise) for impairment. To the extent we determine that such assets have been impaired, we will write-down their carrying value on our consolidated balance sheet and book an impairment charge in our consolidated statement of operations. At December 31, 2023 and 2022, we conducted such analyses that resulted in no impairment. The net carrying value of goodwill totaled $0.8 million at December 31, 2023 and 2022, respectively.
We operate in a highly competitive industry, which could reduce our growth opportunities, revenue and operating results.
The mission-critical information technology industry in which we operate is highly competitive and continues to become more competitive. We often compete against divisions of large information technology consulting and integration companies, including several large domestic companies that may have financial, technical and marketing resources that exceed our own. These larger competitors have an infrastructure and support greater than ours, and accordingly, we continue to experience some price pressure as some companies are willing to take on projects at lower margins. Our competitors may develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position. Our size often prevents us from bidding on larger, more profitable projects, which significantly reduces our growth opportunities. Although our customers currently outsource a significant portion of these services to us and our competitors, we can offer no assurance that our existing or prospective customers will continue to outsource specialty contracting services to us in the future.
Most of our contracts may be canceled on short notice, so our revenue and potential profits are not guaranteed.
Most of our contracts are cancelable on short notice by the customer either at its convenience or upon our default. If one of our customers terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profit from that contract. If one of our customers terminates the contract due to our default, we could be liable for excess costs incurred by the customer in re-procuring services from another source, as well as other costs. Many of our contracts, including our service agreements, are periodically open to bid. We may not be the successful bidder on our existing contracts that are re-bid. We also provide a portion of our services on a non-recurring, project-by-project basis. We could experience a reduction in our revenue, profitability and liquidity if our customers cancel a significant number of contracts, we fail to win a significant number of our existing contracts upon re-bid, or we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects. In addition, we provide services under certain master service agreements. If these agreements are terminated, we would be unable to provide ongoing services to those customers.
We submit change orders to our customers for work we perform beyond the scope of some of our contracts. If our customers do not approve these change orders, our results of operations could be adversely impacted.
We typically submit change orders under some of our contracts for payment of work performed beyond the initial contractual requirements. The applicable customers may not approve or contest these change orders and we cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, our results of operations could be adversely impacted.
We may not accurately estimate the costs associated with services provided under fixed-price contracts, which could impair our financial performance.
Approximately 90% 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.
We warranty customer equipment against failure in some of our fixed price contracts, and a major equipment failure could have a material impact on our financial performance.
Under some of our maintenance contracts we provide limited warranties for the continued performance of equipment, including batteries and actuators used in modular data centers. We estimate the anticipated failure or replacement rate of this equipment, but if a customer location experienced a failure rate of equipment greater than we anticipated, we would incur higher equipment replacement costs and incur a loss on that maintenance contract, and potentially this could have a material negative impact on our profitability and liquidity.
We may choose, or be required, to pay our subcontractors even if our customers do not pay or delay paying us for the related services.
We use subcontractors to perform many portions of our services and to manage workflow. In some cases, we pay our subcontractors before our customers pay us for the related services. If we choose, or are required, to pay our subcontractors for work performed for customers who fail to pay, or delay paying us for the related work, we could experience a decrease in profitability and liquidity.
The industries we serve have experienced and may continue to experience rapid technological, structural and competitive changes that could reduce the need for our services and adversely affect our revenues.
The mission-critical information technology industry is characterized by rapid technological change, intense competition and changing consumer and data center needs. We generate a significant portion of our revenues from customers in the mission-critical information technology industry. New technologies, or upgrades to existing technologies by customers, could reduce the need for our services and adversely affect our revenues and profitability. Improvements in existing technology may allow companies to improve their networks without physically upgrading them. Reduced demand for our services or the loss of a significant customer or end-user could adversely affect our results of operations, cash flows and liquidity.
We may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers may adversely affect our business.
We believe that our future success will depend in large part on our continued ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional, and technical personnel. Our business involves the development of tailored solutions for customers, a process that relies heavily upon the expertise and services of employees. Accordingly, our employees are one of our most valuable resources. Competition for skilled personnel is intense in our industry. Recruiting and training these personnel require substantial resources particularly when seeking qualified staff in remote locations where a number of our customers operate their data centers. Our failure to attract and retain qualified personnel could increase our costs of performing our contractual obligations, reduce our ability to efficiently satisfy our customers’ needs, limit our ability to win new business and constrain our future growth.
If we are unable to engage appropriate subcontractors or if our subcontractors fail to perform their contractual obligations, our performance as a prime contractor and ability to obtain future business could be materially and adversely impacted.
Our contract performance may involve subcontracts with other companies upon which we rely to perform all or a portion of the work we are obligated to deliver to our customers. Our inability to find and engage appropriate subcontractors or a failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely affect our ability to perform our obligations as a prime contractor.
In extreme cases, a subcontractor’s performance deficiency could result in the customer terminating the contract for default with us. A default termination could expose us to liability for excess costs of procurement by the customer and have a material adverse effect on our ability to compete for future contracts and task orders.
Security breaches and attacks on our computer systems could lead to significant costs and disruptions that could harm our business, financial results and reputation.
We are reliant upon a number of third-party and internally developed software programs to operate our business. We store and transmit our own as well as customer information and data, including individual data of and about their end-user customers. Maintaining the security and availability of our services, network and internal IT systems and the security of information we hold is a critical issue for us and our customers. Any software failure or corruption, including cyber-based attacks or network security breaches, could lead to the dissemination of proprietary information or sensitive, personal or confidential data about us, our employees, customers and end-user customers, could threaten our ability to provide services to our customers, generate negative publicity about us, result in litigation and increased legal liability or costs or lead to government inquiry or oversight. The occurrence of any of these events could harm our business or damage our brand and reputation, lead to the loss of customers and higher expenses, and possibly impede our present and future success in retaining and attracting new customers.
A successful assault on our infrastructure damage to our reputation and could adversely affect our financial condition. Similar security risks exist with respect to our business partners and the third-party vendors we rely on for aspects of our information technology infrastructure, support services and administrative functions. As a result, we are subject to the risk that the activities of our business partners and third-party vendors may adversely affect our business even if an attack or breach does not directly impact our systems.
Because we do not currently intend to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including, among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facility and other financing arrangements. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares.
Our insiders beneficially own a significant portion of our outstanding common stock. Future sales of common stock by these insiders may adversely affect the market price of our common stock.
Our officers, directors or their affiliates beneficially own approximately 6.9 million shares of common stock or approximately 30% of our outstanding common shares as of March 28, 2024. Stock sales by our directors and officers are subject to compliance with our Code of Conduct and the preapproval process from the Chief Financial Officer. Sales of a substantial number of these shares in the public market could decrease the market price of our common stock. In addition, the perception that such sales might occur may cause the market price of our common stock to decline. Future issuances or sales of our common stock could have an adverse effect on the market price of our common stock.
Our shares are thinly traded and may not be readily marketable.
Our shares are not widely traded, and daily trading volume is generally very low compared with most publicly traded companies. As a result, you may not be able to readily resell your shares in the company.
Our common stock may be characterized as a “penny stock” under applicable SEC regulations.
Our common stock may be characterized as “penny stock” under SEC regulations. As such, broker-dealers dealing in our common stock may be subject to the disclosure rules for transactions involving penny stocks, which generally require that, prior to a purchase, the broker-dealer determine if purchasing the common stock is suitable for the applicable purchaser. The broker-dealer must also obtain the written consent of the applicable purchasers to purchase the common stock and disclose the best bid and offer prices available for the common stock and the price at which the broker-dealer last purchased or sold the common stock. These additional burdens imposed upon broker-dealers may discourage them from effecting transactions in our common stock, which could make it difficult for an investor to sell his, her or its shares at any given time.
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Item 1B. |
Unresolved Staff Comments. |
Not applicable.
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Item 1C. |
Cybersecurity |
We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information.
We design and assess our program based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF). This does not mean that we meet any particular technical standards, specifications, or requirements, but only that we use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business.
As part of our cybersecurity risk management system, our IT management team tracks and logs privacy and security incidents across our OEM partners, Microsoft and Oracle and other IT system providers, our vendors, and other third-party service providers to remediate and resolve any such incidents. Any significant incidents are reviewed regularly by a cross-functional working group to determine whether further escalation is appropriate. Any incident assessed as potentially being or potentially becoming material is immediately escalated for further assessment, and then reported to designated members of our senior management. We would consult with outside counsel as appropriate, including on materiality analysis and disclosure matters, and our senior management makes the final materiality determinations and disclosures and other compliance decisions. Our management is tasked with apprising TSS’s independent public accounting firm of matters and any relevant developments.
Our Board considers cybersecurity risk as part of its risk oversight function and has delegated to the Audit Committee oversight responsibility for risks and incidents relating to cybersecurity threats, including compliance with disclosure requirements, cooperation with law enforcement, and related effects on financial and other risks. The Audit Committee oversees management’s implementation of our cybersecurity risk management program, and it reports any findings and recommendations, as appropriate, to the full Board for consideration. Senior management regularly discusses cyber risks and trends and, should they arise, any material incidents with the Audit Committee. The Company’s IT department regularly uses specialist firms to independently test our cybersecurity controls. The IT management team is informed about and monitors the prevention, detection, mitigation and remediation of cybersecurity risks and incidents through various means, which may include, among other things, briefings with security personnel, threat intelligence and other information obtained from government, public or private sources, including external consultants engaged by us, and alerts and reports produced by security tools deployed in our IT environment.
At this time, we have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. We face certain ongoing risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial conditions. See “Risk Factors - Security breaches and attacks on our computer systems could lead to significant costs and disruptions that could harm our business, financial results and reputation”.
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Item 2. |
Properties. |
We lease a production facility, warehouse and office space in Round Rock, Texas and in 2021 renewed a 7-year lease for this space. We believe that our current facilities are adequate for our operations and additional or replacement facilities would be available if necessary.
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Item 3. |
Legal Proceedings |
We are not a party to any material litigation in any court, and we are 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 such as employment-related matters. We believe that any potential 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.
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Item 4. |
Mine Safety Disclosures |
Not applicable.
PART II
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The market for our common stock is limited due to the relatively low trading volume of our common stock and lack of analyst coverage. Our common stock is currently quoted on the OTCQB tier of OTC Markets Group, Inc. under the symbol “TSSI.” The OTCQB is a centralized quotation service that collects and publishes market-maker quotes for over-the-counter securities in real time. Over-the-counter market quotations, like those on the OTCQB, reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The following table sets forth the high and low bid prices for our common stock for each of the quarters of 2023 and 2022 as reported by the OTC Markets Group:
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2023 |
2022 |
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Low |
High |
Low |
High |
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First Quarter |
$ | 0.42 | $ | 0.59 | $ | 0.32 | $ | 0.52 | ||||||||
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Second Quarter |
0.25 | 0.50 | 0.38 | 0.46 | ||||||||||||
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Third Quarter |
0.27 | 0.44 | 0.41 | 0.71 | ||||||||||||
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Fourth Quarter |
0.25 | 0.45 | 0.51 | 0.68 | ||||||||||||
As of March 28, 2024, there were 84 stockholders of record of our common stock, although we believe there is a larger number of beneficial owners of our common stock.
We did not pay dividends on our outstanding stock during the years ended December 31, 2023 and 2022. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including, among others, our results of operations, financial condition and cash requirements, business prospects and the terms of our credit facilities and other financing arrangements.
The following table provides information as of December 31, 2023 with respect to shares of our common stock that may be issued under equity compensation plans:
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Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans |
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Equity compensation plans approved by security holders |
970,000 | $ | 0.12 | 3,351,708 | ||||||||
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Equity compensation plans not approved by security holders |
1,700,000 | 0.60 |
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None | ||||||||
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Total |
2,670,000 | $ | 0.43 | 3,351,708 | ||||||||
The following table provides information with respect to shares of our common stock that were acquired by the Company during the fourth quarter of 2023:
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Monthly Period During the Quarter Ended December 31, 2023 |
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 |
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Oct. 1, 2023 - Oct. 31, 2023 |
- | $ | - | - | - | |||||||||||
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Nov. 1, 2023 – Nov. 30, 2023 |
17,790 | $ | 0.39 | |||||||||||||
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Dec. 1, 2023 – Dec. 31, 2023 |
- | $ | - | - | - | |||||||||||
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Total |
17,790 | $ | 0.39 | |||||||||||||
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(a) |
All of these shares were acquired from associates to satisfy tax withholding or purchase price requirements upon the exercise of stock option grants. |
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Item 6. |
Selected Financial Data and Supplementary Financial Information |
The information called for by this item is not required as we are a smaller reporting company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains statements that are forward-looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of, among other reasons, factors discussed in Item 1A – Risk Factors and elsewhere in this Annual Report. The commentary should be read in conjunction with the consolidated financial statements and related notes and other statistical information included in this Annual Report.
Overview
TSS, Inc. (“TSS”, the “Company”, “we”, “us” or “our”) provides a range of integration and technology services that enable enterprises and users to successfully implement, operate and maintain their Information Technology systems. As a provider of technology services businesses built on a platform of experienced program management, we have expertise in delivering complex, end-to-end IT technology solutions cost-effectively. These IT solutions can be deployed in a variety of physical settings such as data centers, co-location facilities, server rooms, modular or edge-based solutions, security operations, and communications facilities. Our services include rack and systems integration, configuration services, data center and modular data center facility management integrations, deployment and maintenance services, strategic procurement services, project management and technology consulting, design and engineering services. Our headquarters and our systems integration and configuration services facility are located in Round Rock, Texas
We support a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDC), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more computing and storage capacity. In 2023 these enterprises shifted their investment priorities towards artificial intelligence (AI) and accelerated computing infrastructure initiatives. Enterprises and data center operators are facing immense pressure to rapidly integrate and deploy the latest AI equipment and GPUs and will need to adopt these next-generation servers and custom rack-scale architectures to compete in the market successfully and quickly. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.
Over the last ten years, we have focused our business on providing world-class integration services to our customer base. As computing technologies evolve, and as we currently see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our rack and systems integration businesses to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM customer to win contracts and to provide business to us under “Master Service Agreements”. The loss of this customer could have a material negative effect on our results. Our operational focus is to ensure this doesn’t happen.
Most 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 revenues reflect only the services we perform, and the consigned components are not reflected in our income statement or on our balance sheet. We also offer our customers strategic procurement services whereby we procure third-party hardware, software, and services on their behalf. Our configuration and integration service businesses integrate these components to deliver a complete system to our customers.
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. However, we have no control over 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 activities allow us to develop relationships with new hardware, software, and professional service providers and allow us to generate higher margins on integration projects by broadening our revenue and customer base.
Our facilities business rebounded in the second half of 2022 as COVID-related supply chain conditions improved and the number of Modular Data Center (MDC) deployments that we performed increased as we satisfied the backlog that had accumulated during the COVID pandemic. This led to a $3.9 million increase in revenues from MDC deployments in our fiscal year 2022. We have since seen a $3.7 million decrease in revenue from MDC deployments in 2023 compared to 2022. This whiplash impact has altered the underlying demand and delivery of MDC deployments, and we expect the number of MDC deployments that we complete to fluctuate on a quarterly basis for the foreseeable future, causing our quarterly revenues and profits to fluctuate. To offset this, we are selectively investing in direct sales capabilities to work alongside our OEM partners to re-create demand lost during and post the pandemic period.
Our systems integration business was negatively impacted during the COVID pandemic due to logistical and supply-chain issues. Supply constraints that initially were due to disruptions caused by the pandemic have continued to occur and create obstacles that still affect component supply to us and negatively impact our integration revenues. The latter half of 2023 was characterized by supply shortages of AI chips and servers, and challenges procuring fiber-optic and high-speed cables for example. We believe that these ongoing constraints will dissipate as additional production capacity comes online, and we are optimistic that increases in demand for AI solutions will create new opportunities to grow our integration business in 2024 and beyond. As this AI technology and other computing technology evolves, including liquid-cooled solutions, we believe this will drive growth in the data center market and provide new revenue opportunities for us. Despite these ongoing challenges, there has been an improvement in supply-chain issues since the second half of 2022, which, along with pricing adjustments, has helped us grow our integration revenues by 23% in 2023 compared to 2022.
The volume of transactions we engaged in with our strategic procurement services grew substantially in 2023. Customers value our ability to source disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported revenues will be different and only reflect our fees earned in the transaction. Overall, we were able to increase our revenues from procurement transactions by $25.3 million or 191%, compared to 2022. The aggregate gross value of all procurement transactions increased from $73 million in 2022 to $123.1 million in 2023.
Our total revenue in 2023 was $54.4 million, a $23.8 million or 78% increase from our 2022 revenues of $30.6 million. The majority of this increase came from growth in our procurement and systems integration businesses, offset by a $3M decrease in our facilities revenues as the number of MDC deployments decreased compared to 2022.
Our gross profits increased by $2 million or 23% compared to 2022, mainly due to the higher volumes of activity in our procurement and integration businesses. Our gross profit margin as a percentage of sales decreased to 20% in 2023 from 29% in 2022. The primary cause of the decrease in gross profit margin percentage was the increase in volume of our procurement business as a proportion of our total revenue, where we generally earn much lower margins on product purchase/resell services than we do with our traditional maintenance and integration services. Absent this business, the margins on our core integration and maintenance operations decreased to 36% in 2023 from 37% in 2022 due to the lower volume of maintenance business during 2023.
Our selling, general and administrative expenses of $8.9 million were 16% higher than the $7.7 million we recorded in selling, general and administrative expenses in 2022. The increase was primarily due to higher labor costs as we made a number of strategic investments during 2023 in our sales, marketing, production and support organizations, to enable us to expand our capabilities and to position us to capitalize on future growth opportunities.
Because of the higher overall gross profits, even with higher selling, general and administrative expenses, we were able to improve our operating profit by $0.8 million or 91% from 2022, recording operating income of $1,750,000 in 2023 compared to an operating profit of $914,000 that we recorded in 2022.
Our interest expense increased by $0.7 million compared to 2022. This was due to a combination of higher interest rates during 2023 and higher levels of activity in our procurement business compared to the prior year. During 2023 we transacted approximately $123.1 million in transactions in this business activity, although $84.5 million of this was for agent-type transactions. With the receivable-financing program that we have with a third-party banking partner, all of these procurement transactions are financed via this program, and we incur interest costs on the gross value of these transactions. As the gross volume increases in these procurement activities, our interest cost will increase. This increase in volume was exacerbated by the increase in interest rates during 2023. By comparison, we transacted approximately $72.8 million in such transactions in 2022.
We ended 2023 with $11.8 million of cash on hand, a decrease of $8.6 million from the balance at the end of 2022. This decrease was primarily due to the timing of cash flows connected with our procurement activities. The volume of procurement activities in progress was lower at the end of 2023 compared to the end of 2022. These activities resulted in a large increase in our accounts payable at the end of 2022 which were paid in the first quarter of 2023. The procurement activities drive large quarterly fluctuations in our accounts receivables, inventory and deferred revenues, depending on the timing of particular transactions. We were able to generate $14.7 million of cash flows from operations during 2022 but as the transactions completed, we used $8.3 million in operating activities during 2023. We have been able to structure our procurement 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.
Critical Accounting Policies and Estimates
We consider an accounting policy to be critical if:
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● |
the accounting estimate requires us to make assumptions about matters that are highly uncertain or require the use of judgment at the time we make that estimate; and |
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● |
changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we could have reasonably used instead in the current period, would have a material impact on our financial condition or results of operations. |
Management has reviewed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed these disclosures. In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above. Changes in these and other items could still have a material impact on our financial statements.
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 contracts 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 typically 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 creditworthiness 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 30-105 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of expected credit losses based on current estimates, which also includes a review of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customer’s creditworthiness. As of December 31, 2023 and 2022, our allowance for doubtful accounts was $7,000.
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 typically 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 revenue. 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. 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 procurement services revenue upon completion of the procurement activity. 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 procurement 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 sales 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):
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Year ended December 31, |
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2023 |
2022 |
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FACILITIES: |
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Maintenance revenues |
$ | 4,543 | $ | 3,668 | ||||
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Equipment sales |
844 | 1,149 | ||||||
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Deployment and other services |
1,680 | 5,391 | ||||||
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Total facilities revenues |
7,067 | 10,208 | ||||||
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SYSTEMS INTEGRATION: |
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Integration services |
8,817 | 7,186 | ||||||
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Procurement services |
38,515 | 13,243 | ||||||
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Total systems integration revenues |
47,332 | 20,429 | ||||||
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TOTAL REVENUES |
$ | 54,399 | $ | 30,637 | ||||
Remaining Performance Obligations
Remaining performance obligations include deferred revenues 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 December 31, 2023, current deferred revenue of $3,370,000 consists of $2,404,000 representing our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and $966,000 relating to procurement and integration services where we have yet to complete our services for our customers as of December 31, 2023, all of which are expected to be recognized within one year.
Intangible Assets
We recorded goodwill and intangibles with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. Intangible assets with finite lives are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is not amortized.
We perform an impairment test of goodwill on an annual basis with a measurement date of December 31, or whenever events or circumstances make it more likely than not that impairment of goodwill may have occurred. Our goodwill impairment test involves comparing the fair value of a reporting unit with its carrying amount. If that fair value exceeds the carrying amount, no impairment charge is required to be recorded. If the carrying value exceeds the reporting unit’s fair value, an entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment losses recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of a reporting unit will be determined using a discounted cash flow, which requires the use of estimates and assumptions. Significant assumptions that may be required include forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may have a material impact on the conclusions reached.
We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.
Allowance for Doubtful Accounts
We estimate an allowance for doubtful accounts based on factors related to the specific credit risk of each customer. Historically our credit losses have been minimal. We perform credit evaluations of new customers and may require prepayments or use of bank instruments such as trade letters of credit to mitigate credit risk. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.
Stock Based Compensation
We account for stock-based compensation using a fair-value based recognition method. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information that can change significantly over time. A small change in estimates used can have a relatively large change in the estimated valuation.
We use the Black-Scholes option valuation model to value employee stock option awards that are not performance-based awards. We estimate stock price volatility based upon our historical volatility. Estimated option life and forfeiture rate assumptions are derived from historical data. For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award. For stock-based compensation awards with graded vesting, we recognize compensation expense using the straight-line amortization method. For performance-based stock awards, if applicable, we may use third-party valuation specialists and a Monte-Carlo simulation model to ascertain the fair value of the award at grant date.
Results of Operations
Comparison of 2023 to 2022
Revenue
Revenue consists of fees earned from the planning, design and project management of mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services on these facilities. We also earn revenue from providing system configuration and integration services, including procurement 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 of the customer’s equipment (generally excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter 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, construction and project-management services in a concentrated number of high-value contracts for the construction of new data centers, but we have transitioned our business away from this market. We have also focused on providing maintenance services for modular data center applications as this market matures. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize the assets in that business, and through adding additional services such as procurement services and data center moves, to help drive volume through the facility. This includes adapting our integration services to stay abreast of emerging technologies such as immersion computing, liquid-cooled computing, and edge-based technology, so that we can help our customers succeed in these new markets.
Our total revenue in 2023 was $54.4 million, a $23.8 million or 78% increase from our 2022 revenues of $30.6 million. The majority of this increase came from growth of $25.3 million in our procurement business and from growth of $1.6 million in our systems integration business, offset by a $3.1 million decrease in our facilities revenues as the number of MDC deployments decreased compared to 2022.
Our procurement business involves us procuring third-party hardware, software and services on our customers’ behalf that are then typically used in our integration services as we integrate those components to deliver a completed system to our customer. The volume and timing of revenues from our procurement business has been unpredictable and subject to large fluctuations, especially on a quarterly basis. Most transactions are for discrete projects that do not recur, and the time to complete most projects is usually less than six months. 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 customer by another party, and we have no control over 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. We had a substantial increase in the number of procurement transactions we completed in 2023 compared to 2022, including a large increase in agent-type transactions, that allowed us to increase revenues from procurement activities from $13.2 million in 2022 to $38.5 million in 2023.
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 80% for the year ended December 31, 2023, compared to 71% for 2022. This increase is primarily due to the higher proportion of our total revenue that is from procurement services in 2023. Absent the procurement business, the cost of revenue as a percentage of revenue on our traditional integration and maintenance businesses was 64% in 2023 compared to 63% in 2022.
Our procurement revenues were 71% of total revenue in 2023 compared to 43% of total revenues in 2022. We earn much lower margins from our procurement services, unless we are acting as an agent in the transaction, than we do with our traditional maintenance and integration services. As the percentage of revenues derived from procurement services increases, we would anticipate that cost of revenue as a percentage of sales will also increase, and result in lower gross profit margins.
Since we earn higher profits when using our own labor services, we expect gross margins to improve when our labor service mix increases relative to the use of subcontracted 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 allows us to increase income, broaden our revenue base and have a favorable return on invested capital. As we increase the level of procurement and 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 year ended December 31, 2023 was 20% compared to a gross profit margin of 29% for the year ended December 31, 2022. This decrease in gross profit margin as a percentage of revenue compared to 2022 was primarily from the higher percentage of our total revenue in 2023 that came from procurement services. As the percentage of total revenue from procurement services increases, our gross profit margin will decrease as the cost of sales is higher for this revenue than our traditional integration and facilities revenues. Absent the impact from our procurement services, the gross profit margin on our traditional integration and facilities revenues was 36% in 2023 compared to 37% in 2022.
The growth in our total revenues in 2023 compared to 2022 allowed us to increase our overall gross profit by 23% or $2 million to $11 million in 2023 compared to gross profit of $9 million in 2022.
Our ability to maintain and to further improve gross profits will depend, in part, upon our ability to continue increasing sales of our higher-margin services including maintenance and integration services, improve our service margins by passing our higher operating costs on to our customers through increasing pricing, improving the operating efficiency of the integration business including utilization of our direct labor, and increasing the total revenues to a level that will allow us to increase and improve the utilization of our integration and service operations. Our gross profit margin is also likely to fluctuate based on the proportion of our total revenues that comes from our procurement activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of compensation and related expenses, including variable sales and incentive compensation, for our executive, administrative, sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs. For the year ended December 31, 2023, our selling, general and administrative expenses of $8.9 million increased by $1.2 million, or 16%, compared to 2022. The increase was primarily due to higher labor costs as we made a number of strategic investments during 2023 in our sales, marketing, production and support organizations, to enable us to expand our capabilities and to position us to capitalize on future growth opportunities.
Operating income
Because of the higher absolute gross profits, even with the higher level of selling, general and administrative expenses, we were able to improve our operating profit by $0.8 million or 91% from 2022 and record an operating income of $1,750,000 in 2023 compared to operating income of $914,000 that we recorded in 2022.
Interest expense, net
For the year ended December 31, 2023 we recorded interest expense, net of interest income, of $1,616,000. This compares to interest expense, net of interest income, of $931,000 for the year ended December 31, 2022. The increase in interest expense was due to both higher interest rates in 2023 compared to 2022 and to an increase in the value of transactions that were factored, which was approximately $137 million in 2023 compared to approximately $87.8 million in 2022. The increase in amounts factored was because of the higher number of procurement projects, including agent-type transactions, that we processed in 2023. This increase in interest expense attributable to factoring was partially offset in 2023 when there was no interest expense for related party debt which was extinguished in July 2022. We were also able to offset this increase with an additional $322,000 of interest income during 2023 as we managed cash flows from our procurement transactions and were able to invest surplus funds until required.
Income tax expense
Due to a history of consolidated net operating losses, we have not recorded any income tax expenses, other than minimum or statutory costs. As of December 31, 2023, our accumulated net operating loss carry-forward was $40 million. We anticipate that these loss carry-forwards may offset future taxable income that we may achieve and future tax liabilities. However, because of uncertainty regarding our ability to use these carry forwards and the potential limitations due to ownership changes, we have established a valuation allowance for the full amount of our net deferred tax assets.
Net income (loss)
After net interest and income taxes, we recorded net income of $74,000, or $0.00 per share for the year ended December 31, 2023. This compares to a net loss of $73,000, or $(0.00) per share we recorded for the year ended December 31, 2022.
Comparison of 2022 to 2021
Revenue
Our total revenue in 2022 was $30.6 million, a $3.2 million or 12% increase from our 2021 revenues of $27.4 million. Our facilities revenues increased by $3.1 million or 44% to $10.2 million, driven by an increase in deployments of MDCs as customer projects delayed by the COVID-19 pandemic during 2021 were now able to be completed. Our systems integration revenues grew by $1.5 million or 27% compared to 2021 as supply-chain issues attributable to the COVID-19 pandemic dissipated, and because of stronger demand from our OEM partner. Our procurement revenues decreased by $1.4 million or 10% compared to 2021 because we completed more agent-type transactions in 2022 than we did in 2021, resulting in lower recorded revenue but higher profits from this line of business.
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 71% for the year ended December 31, 2022, compared to 77% for 2021. This decrease in margin percentage from 2021 reflects the lower proportion of our total revenues that come from our procurement activities. Our procurement revenues were 43% of total revenue in 2022 compared to 54% of total revenues in 2021. 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 maintenance and integration services. As the percentage of revenues derived from procurement services decreases, we would anticipate that cost of revenue as a percentage of sale will decrease.
Gross Profit
Our gross profits increased by $2.6 million or 41% compared to 2021, mainly due to the higher volume of activity across all our business units, and our gross profit margin as a percentage of sales increased to 29% in 2022 from 23% in 2021. The increase in gross profit was greater than the increase in total revenues due in part to the impact of growth in the number of agent-type transactions in our procurement business in 2022. Under these transactions we recognize as revenue the net margin we receive after paying the other party for goods or services that they deliver to the customer. Profits from our procurement services increased by $1.7 million in 2022 compared to 2021. Absent this business, the margins on our core integration and maintenance operations decreased from 44% in 2021 to 37% in 2022 despite higher revenues. This was primarily due to an increase in costs, particularly labor costs, in our integration business that reflected higher wage inflation, higher levels of employee turnover that impacted efficiency, and development and other costs incurred in developing and introducing new types of integration service during 2022.
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 year ended December 31, 2022, our selling, general and administrative expenses of $7.7 million increased by $1 million, or 15% compared to 2021. The increase was primarily due to higher labor costs, including approximately $0.6 million attributable to a change in our chief executive officer in the fourth quarter of 2022, and the impact of wage inflation on our workforce which was more pronounced during 2022 than in previous years.
Operating Income
Because of the higher absolute gross profits, even with the higher level of selling, general and administrative expenses, we were able to improve our operating profit by $1.7 million or 210% from 2021, and recorded operating income of $914,000 in 2022 compared to an operating loss of $831,000 that we recorded in 2021.
Interest expense
For the year ended December 31, 2022, we recorded interest expense, net of interest income, of $931,000. This compared to interest expense, net of interest income, of $401,000 for the year ended December 31, 2021. The increase in interest expense was due to the higher number of agent-type transactions that were factored in our procurement business compared to 2021. Interest expense in our procurement activities increased by $480,000 in 2022 due to the higher number of transactions and the impact of higher interest rates during 2022.
Income tax expense
Due to a history of consolidated net operating losses, we have not recorded any income tax expenses, other than minimum or statutory costs. As of December 31, 2022, our accumulated net operating loss carry forward was $41 million. We anticipate that these loss carry-forwards may offset future taxable income that we may achieve and future tax liabilities. However, because of uncertainty regarding our ability to use these carry forwards and the potential limitations due to ownership changes, we have established a valuation allowance for the full amount of our net deferred tax assets.
Net income (loss)
After interest, other income and income taxes, we recorded a net loss of $73,000, or $(0.00) per share for the year ended December 31, 2022. This compares to a net loss of $1.3 million, or $(0.07) per share we recorded for the year ended December 31, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity at December 31, 2023 are our cash and cash equivalents on hand, funds available under our bank credit facility and projected cash flows from operating activities.
As of December 31, 2023, the Company had an accumulated deficit of $66,311,000. Although we reported operating income in 2023 and 2022 and net income in 2023, we do have a history of annual operating and net losses which have been due, in part, to the effects of COVID-19 and subsequent supply chain constraints. These factors may be indicative of doubt regarding 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 program, and trade credit extended to us by our vendors, or under our revolving credit facilities with our bank. If our 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 we could 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 to increase the scale of our operations, or if there is a sudden increase in the level of procurement services. There can be no assurance as to the Company’s ability to scale its business operations on terms upon which additional financing might be available.
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have been able to grow our revenues and order backlog and seen an improvement in supply chain constraints. We believe that we will continue to be profitable on a quarterly and annual basis in 2024 and beyond. As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset 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.
As of December 31, 2023 and 2022, we had cash and cash equivalents of $11.8 million and $20.4 million, respectively.
Significant uses of cash
Operating activities:
Cash used in operating activities was $8.3 million for the year ended December 31, 2023, compared to cash provided by operating activities of $14.7 million for the year ended December 31, 2022. This change in cash from operating activities was primarily attributable to the timing and financial impacts of our procurement services. The volume of procurement activities was higher at the end of 2023 compared to the end of 2022, however, at the end of 2022 we were able to be paid for multiple large procurement projects but had yet to pay vendors for these same projects. This resulted in an increase of approximately $14 million in our outstanding accounts payable at the end of 2022. During the first quarter of 2023 we paid those vendors, and both our cash and accounts payable decreased by over $14 million. The increases in our inventory and receivables in 2023 compared to 2022 are also attributable to the timing of in-progress procurement projects. We have been able to structure our procurement 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 and annual basis for procurement projects that are in progress at the end of a reporting period. We believe that we will have adequate trade credit available to use to continue financing our procurement activities as we grow this business during 2024 and beyond.
Investing activities:
Cash used in investing activities was $0.3 million in 2023, primarily for the upgrading of our integration business and improvements to our facility. This compares to cash used in investing activities of $0.5 million in 2022 for the expansion and upgrading of our integration facility to support our business.
Finance activities:
Cash used in financing activities was $40,000 in 2023 compared to cash used in financing activities of $1.8 million during 2022. The cash used in financing activities during 2023 was for the purchase of stock related to tax obligations around vesting of restricted stock by our employees. In 2022 we used $134,000 for tax obligations around restricted stock vesting, and we received $41,000 in proceeds from the exercise of stock options by employees. We also received $367,000 in proceeds from the exercise of warrants by our former note holders, and we used $2.045 million to repay all of the company’s outstanding long-term debt upon its maturity in July 2022.
Future uses of cash
Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding estimated revenues and future costs and our ability to secure sources of funding when needed. 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 during 2024 and 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, and, if needed, borrowings under our bank credit facility. 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 new lines of business or if we seek to acquire additional businesses as a way to increase the scale of our operations.
New Accounting Pronouncements
Recently Adopted Accounting Guidance
In March 2020, FASB issued Accounting Standards Update ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective beginning on March 12, 2020 and was adopted by us in the fourth quarter of 2022 and did not have any material impact on our consolidated results of operations, cash flows, financial position or disclosure.
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. This guidance was adopted by us in the fourth quarter of 2023 and did not have a material impact on our consolidated results of operation, cash flows, financial position or disclosure.
In May 2019, FASB issued Accounting Standards Update ASU No. 2019-15, Financial Instruments – Credit Losses (Topic 326), (“ASU 2019-15”). ASU 2019-15 provides final guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit losses 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.
Recently Issued Accounting Pronouncements
In November 2023, FASB issued Accounting Standards Update ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. (“ASU 2023-07”). ASU 20203-07 improves reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision-maker, and included within each reported measure of segment profit (referred to as the “significant expense principle”). ASU 2023-07 will become effective for the fiscal year 2024 annual financial statements and interim financial statements thereafter, and will be applied retrospectively for all prior periods presented in the financial statements, with early adoption permitted. We intend to adopt the standard when it becomes effective in the fiscal year 2024 annual financial statements and we are currently evaluating the impact this guidance will have on the disclosures included in the Notes to the Consolidated Financial Statements.
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Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk. |
The information called for by this item is not required as we are a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
a) Audited Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
TSS, Inc.
Round Rock, TX
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of TSS, Inc. and Subsidiaries (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements the Company had one customer which accounted for 96% and 96%, respectively, of total revenue for the years ended December 31, 2023 and 2022. Our opinion is not modified with respect to this matter.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Going Concern Assessment
Critical Audit Matter Description
The Company prepared its consolidated financial statements on the going concern basis of accounting. In accordance with FASB ASC 205-40, Going Concern, when preparing consolidated financial statements for each annual and interim period management is required to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern. As described in Note 1 to the consolidated financial statements, management has performed their analysis in connection with the preparation of these consolidated financial statements and has identified circumstances and events which may give rise to substantial doubt regarding the Company’s ability to continue as a going concern for a reasonable period of time.
We evaluated management’s significant judgements for indicators of events or circumstances which may impact the Company’s ability to continue as a going concern for a reasonable period of time, and management’s plans in regards to those events and circumstances.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s ability to continue as a going concern included obtaining an understanding of the design and implementation of management’s controls and testing the reasonableness of the forecasted revenue, operating expenses, and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year beyond the date of the financial statements being audited. This testing included inquiries of management, comparison of prior period forecasts to operating results, consideration of positive and negative evidence impacting management’s forecasts, the Company’s financing arrangements in place as of the report date, market and industry factors and consideration of the Company’s relationships with its financing partners.
/s/
We have served as the Company’s auditors since 2015.
PCAOB ID
March 28, 2024
TSS, Inc.
Consolidated Balance Sheets
(in ’000 except per-share amounts)
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December 31, |
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2022 |
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Current Assets: |
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Cash and cash equivalents |
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Contract and other receivables, net |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventories, net |
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Total current assets |
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Property and equipment, net |
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Lease right-of-use asset |
||||||||
|
Goodwill |
||||||||
|
Other intangible assets, net |
||||||||
|
Other assets |
||||||||
|
Total assets |
$ | $ | ||||||
|
Current Liabilities: |
||||||||
|
Accounts payable and accrued expenses |
$ | $ | ||||||
|
Deferred revenues |
||||||||
|
Current portion of lease liabilities |
||||||||
|
Total current liabilities |
||||||||
|
Non-current portion of lease liabilities |
||||||||
|
Total liabilities |
||||||||
|
Commitments and Contingencies |
|
|
||||||
|
Stockholders’ Equity: |
||||||||
|
Preferred stock, $ par value, |
||||||||
|
Common stock, $ par value, |
||||||||
|
Additional paid-in capital |
||||||||
|
Treasury stock |
( |
) |
( |
) |
||||
|
Accumulated deficit |
( |
) |
( |
) |
||||
|
Total stockholders' equity |
||||||||
|
Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
TSS, Inc.
Consolidated Statements of Operations
(in ’000 except per-share amounts)
|
Year Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Revenue |
$ | $ | ||||||
|
Cost of revenue |
||||||||
|
Gross profit |
||||||||
|
Selling, general and administrative expenses |
||||||||
|
Depreciation and amortization |
||||||||
|
Income from operations |
||||||||
|
Interest expense, net |
( |
) |
( |
) |
||||
| Income (loss) before income tax provision | ( |
) | ||||||
|
Income tax provision |
||||||||
|
Net income (loss) |
$ | $ | ( |
) | ||||
|
Basic & diluted net income per share |
$ | $ | ( |
) | ||||
See accompanying notes to consolidated financial statements.
TSS, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in ‘000)
|
Additional |
Total |
|||||||||||||||||||||||||||
|
Common Stock |
Paid-in |
Treasury Stock |
Accumulated |
Stockholders' |
||||||||||||||||||||||||
|
Shares |
Amount |
Capital |
Shares |
Amount |
Deficit |
Equity |
||||||||||||||||||||||
|
Balance at January 1, 2022 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
|
Restricted stock vested |
- | - | - | - | - | |||||||||||||||||||||||
|
Treasury stock repurchased |
- | - | - | ( |
) |
( |
) |
- | ( |
) |
||||||||||||||||||
|
Issuance of shares on option exercise |
||||||||||||||||||||||||||||
|
Exercise of warrants |
- | - | - | - | ||||||||||||||||||||||||
|
Stock-based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Net loss for the year |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
|
Balance December 31, 2022 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
|
Restricted stock vested |
- | - | - | - | - | - | ||||||||||||||||||||||
|
Treasury stock repurchased |
- | - | - | ( |
) |
( |
) |
- | ( |
) |
||||||||||||||||||
|
Stock-based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Net income for the year |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance December 31, 2023 |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
TSS, Inc.
Consolidated Statements of Cash Flows
(in ’000)
|
Year Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Cash Flows from Operating Activities: |
||||||||
|
Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
|
Depreciation and amortization |
||||||||
|
Stock-based compensation |
||||||||
|
Amortization of discount on note payable |
||||||||
|
Changes in operating assets and liabilities: |
||||||||
|
Contracts 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: |
||||||||
|
Repurchase of treasury stock |
( |
) | ( |
) |
||||
|
Repayment of long-term borrowings |
( |
) | ||||||
|
Proceeds from exercise of warrants |
||||||||
|
Proceeds from issuance of stock |
||||||||
|
Net cash used in financing activities |
( |
) |
( |
) |
||||
|
Net increase (decrease) in cash |
( |
) | ||||||
|
Cash, beginning of period |
||||||||
|
Cash, end of period |
$ | $ | ||||||
|
Supplemental disclosure of cash flow information: |
||||||||
|
Cash paid for interest |
$ | $ | ||||||
|
Cash paid for taxes |
||||||||
See accompanying notes to consolidated financial statements.
|
Note 1 - |
Significant Accounting Policies |
Description of Business
TSS, Inc. (“TSS”, the “Company”, “we”, “us” or “our”) provides comprehensive services for the planning, design, deployment, maintenance, refresh and take-back of end-user and enterprise systems, including the mission-critical facilities they are housed in. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, system installation, facilities management and IT procurement services. Our corporate offices and integration facility are located in Round Rock, Texas.
The preparation of the consolidated financial statements in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable and that the actual results will not vary significantly from the estimated amounts.
Liquidity
As of December 31, 2023, 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 been able to grow our revenues and order backlog and seen an improvement in supply chain constraints. We believe that we will continue to be profitable on a quarterly and annual basis in 2024. As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Financial Instruments
The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying amounts of the other financial instruments approximate their fair value at December 31, 2023 and 2022, due to the short-term nature of these items. See Note 7 – Fair Value Measurements.
Accounting for Business Combinations
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, is recorded as goodwill.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer contracts, leases, and any other significant assets or liabilities and contingent consideration. Preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.
Revenue Recognition
We recognize 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 typically 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 creditworthiness 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 30-105 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’ creditworthiness. As of December 31, 2023, and 2023, 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 typically 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 revenue. 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, or the moving of equipment to a different location. 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. 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 and reseller 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 procurement services revenue upon completion of the procurement activity. In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided directly 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 on a net basis 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 sales 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):
|
Years ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
FACILITIES: |
||||||||
|
Maintenance revenues |
$ | $ | ||||||
|
Equipment sales |
||||||||
|
Deployment and other services |
||||||||
|
Total facilities revenues |
||||||||
|
SYSTEMS INTEGRATION: |
||||||||
|
Integration services |
||||||||
|
Procurement 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 December 31, 2023, deferred revenue of $
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. We award shares of restricted stock and stock options to employees, managers, executive officers, and directors.
During the years ended December 31, 2023 and 2022, we incurred approximately $
Concentration of Credit Risk
We are economically dependent upon our relationship with a large US-based IT Original Equipment Manufacturer (OEM). If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to them would significantly reduce our revenue.
The following customer accounted for a significant percentage of our revenues for the periods shown:
|
2023 |
2022 |
|||||||
|
U.S.-based IT OEM |
% | % | ||||||
No other customers represented more than 10% of our revenues for any periods presented. Our U.S. based IT OEM customer represented
Cash and cash equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of bank time deposits. We had unrestricted cash of $
Contract and Other Receivables
Accounts receivable are recorded at the invoiced amount and may bear interest in the event of late payment under certain contracts.
Allowance for Doubtful Accounts
We estimate an allowance for doubtful accounts based on estimated credit losses, based on factors related to the specific credit risk of each customer. Historically our credit losses have been minimal. We perform credit evaluations of new customers and may require prepayments or use of bank instruments such as trade letters of credit to mitigate credit risk. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.
The following table summarizes the changes in our allowance for doubtful accounts (in ’000):
|
Year Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Balance at beginning of year |
$ | $ | ||||||
|
Additions charged to expense |
||||||||
|
Recovery of amounts previously reserved |
||||||||
|
Amounts written off |
||||||||
|
Balance at end of year |
$ | $ | ||||||
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all purchased inventories. We write down obsolete inventory or inventory in excess of our estimated usage to its estimated market value less cost to sell, if less than its cost. Inherent in our estimates of net realizable value in determining inventory valuation are estimates related to future demand and technological obsolescence of our products. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventories and our results of operations and financial position could be materially affected.
Property and Equipment
Property and equipment are recorded at cost. We provide for depreciation using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. Depreciation expense is included in operating expenses in the consolidated statements of operations. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Goodwill and Intangible Assets
We have recorded goodwill and intangibles with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. These intangible assets are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is not amortized. The recorded goodwill is allocated to the reporting unit to which the underlying transaction relates.
GAAP requires us to perform an impairment test of goodwill on an annual basis or whenever events or circumstances make it more likely than not that impairment of goodwill may have occurred. As part of the annual impairment test, we compare the fair value of the reporting unit with its carrying amount. If that fair value exceeds the carrying amount no impairment charge is required to be recorded. If the carrying value exceeds the reporting unit’s fair value, an entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of a reporting unit will be determined using a discounted cash flow, which requires the use of estimates and assumptions. Significant assumptions that may be required include forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may have a material impact on the conclusions reached.
We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.
We have elected to use December 31 as our annual assessment date. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period, we will evaluate our indefinite lived intangible assets for impairment. The Company performed a quantitative analysis of our indefinite lived intangible assets at December 31, 2023 and 2022 and concluded there was impairment. The valuation results indicated that the fair value of our reporting units was greater than the carrying value, including goodwill, for each of our reporting units. Thus, we concluded that there was impairment at December 31, 2023 or 2022 for our goodwill and other long-lived intangible assets. At December 31, 2023 and 2022, the carrying value of goodwill was $
Income Taxes
Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The U.S. net operating losses generated prior to 2018 and not utilized can be carried forward for 20 years to offset future taxable income. A full valuation allowance has been recorded against our net deferred tax assets, because we have concluded that under relevant accounting standards it is more likely than not that deferred tax assets will not be realizable. We recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.
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 OEM customer under a non-recourse agreement. Under the arrangement, we sell certain trade receivables on a non-recourse basis and account for the transaction as sales of the receivable. The financial institution assumes the full risk of collection, without recourse to the Company in the event of a loss. Debtors are directed to send payments directly to the financial institution. The applicable receivables are removed from our consolidated balance sheet when the cash proceeds are received by us. We do not service any factored accounts after the factoring has occurred. We utilize this factoring arrangement as part of our financing for working capital. The aggregate gross amount factored under this arrangement was approximately $
Earnings Per-Common Share
Basic and diluted earnings 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 earnings 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.
Treasury Stock
We account for treasury shares using the cost method. Purchases of shares of common stock are recorded at cost and results in a reduction of stockholders’ equity. We hold repurchased shares in treasury for general corporate purposes, including issuances under various employee compensation plans. When treasury shares are issued, we use a weighted average cost method. Purchase costs in excess of reissue price are treated as a reduction of retained earnings. Reissue price in excess of purchase costs is treated as additional paid-in-capital.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
In March 2020, FASB issued Accounting Standards Update ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was effective beginning on March 12, 2020, and was adopted by us in the fourth quarter of 2022 and did not have any material impact on our consolidated results of operations, cash flows, financial position or disclosure.
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 adopted this guidance effective January 1, 2023 and it did not have a material impact on our financial results of operations.
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. We adopted this guidance effective January 1, 2023, and it did not have a material impact on our financial results of operations.
Recently Issued Accounting Pronouncements
In November 2023, FASB issued Accounting Standards Update ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. (“ASU 2023-07”). ASU 20203-07 improves reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision-maker, and included within each reported measure of segment profit (referred to as the “significant expense principle”). ASU 2023-07 will become effective for the fiscal year 2024 annual financial statements and interim financial statements thereafter, and will be applied retrospectively for all prior periods presented in the financial statements, with early adoption permitted. We intend to adopt the standard when it becomes effective in the fiscal year 2024 annual financial statements and we are currently evaluating the impact this guidance will have on the disclosures included in the Notes to the Consolidated Financial Statements.
|
Note 2 - |
Supplemental Balance-sheet Information |
Receivables
Contract and other receivables consisted of the following (in ‘000’s):
|
December 31, 2023 |
December 31, 2022 |
|||||||
|
Contract and other receivables |
$ | $ | ||||||
|
Allowance for doubtful accounts |
( |
) |
( |
) |
||||
| $ | $ | |||||||
Contract assets, consisting of accounts receivable, were $
Inventories
We state inventories at the lower of cost or net realizable value, using the first-in-first-out-method (in ‘000’s) as follows:
|
December 31, 2023 |
December 31, 2022 |
|||||||
|
Materials and component parts |
$ | $ | ||||||
|
Reseller inventories |
||||||||
|
Reserve |
( |
) |
( |
) |
||||
|
Inventories, net |
$ | $ | ||||||
Goodwill and Intangible Assets
Goodwill and Intangible Assets consisted of the following (in ‘000’s):
|
December 31, 2023 |
December 31, 2022 |
|||||||||||||||
|
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):
|
December 31, 2023 |
December 31, 2022 |
|||||||
|
Facilities unit |
$ | $ | ||||||
|
Systems Integration unit |
||||||||
|
Total |
$ | $ | ||||||
At December 31, 2023, the date of our last annual test, 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 $
Property and equipment
Property and equipment consisted of the following (in ’000’s):
| Estimated
Useful |
December 31, |
||||||||||||
|
Lives |
2023 |
2022 |
|||||||||||
|
(years) |
|||||||||||||
|
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):
|
December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Accounts payable |
$ | $ | ||||||
|
Accrued expenses |
||||||||
|
Compensation, benefits and related taxes |
||||||||
|
Other accrued expenses |
||||||||
|
Total accounts payable and accrued expenses |
$ | $ | ||||||
|
Note 3 - |
Revolving Line of Credit |
In May 2023, we renewed our 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, 2023. The obligations under the credit facility are secured by substantially all of our assets. Our wholly-owned subsidiaries, Vortech L.L.C., 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.
The maximum amount we would have been eligible to borrow at December 31, 2023 was approximately $
|
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 sheets. 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):
|
Years ended December 31, |
||||||||
| 2023 | 2022 | |||||||
|
Lease expense |
||||||||
|
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 December 31:
|
2023 |
2022 |
|||||||
|
Weighted average remaining lease term – operating leases (months) |
||||||||
|
Weighted average discount rate – operating leases |
% | % | ||||||
Future minimum lease payments under non-cancellable leases as of December 31, 2023, were as follows (in ‘000’s):
|
Fiscal Year |
||||
|
2024 |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Thereafter |
||||
|
Total minimum future lease payments |
||||
|
Less imputed interest |
( |
) | ||
|
Total |
$ | |||
|
Reported as of December 31, 2023: |
||||
|
Current portion of lease liability |
$ | |||
|
Non-current portion of lease liability |
||||
| $ | ||||
|
Note 5 – |
Income Taxes |
Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are established for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.
The provision for income taxes from continuing operations consists of the following (in $’000):
|
Year Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Current: |
||||||||
|
Federal |
$ | $ | ||||||
|
State |
||||||||
|
Deferred: |
||||||||
|
Federal |
||||||||
|
State |
||||||||
|
Total provision for income taxes before valuation allowance |
$ | $ | ||||||
|
Change in valuation allowance |
||||||||
|
Total provision for income taxes |
$ | $ | ||||||
The significant components of our deferred tax assets and liabilities are as follows (in $’000):
|
December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Deferred tax assets: |
||||||||
|
Accrued expenses |
$ | $ | ||||||
|
Net operating loss carryover |
||||||||
|
Goodwill and other intangibles |
||||||||
|
Deferred compensation |
||||||||
|
Depreciation |
( |
) | ||||||
|
Deferred revenue |
||||||||
|
Lease liability |
||||||||
|
Interest expense |
||||||||
|
Other carryovers and credits |
||||||||
|
Total deferred tax assets |
||||||||
|
Deferred tax liabilities: |
||||||||
|
Prepaid expenses |
$ | ( |
) |
$ | ( |
) |
||
|
Right-of-use asset |
( |
) |
( |
) |
||||
|
Total deferred tax liabilities |
( |
) |
( |
) |
||||
|
Valuation Allowance |
( |
) |
( |
) |
||||
|
Net deferred tax asset (liability) |
$ | $ | ||||||
At December 31, 2023 and 2022, we had net operating losses (“NOL”) of approximately $
Utilization of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.
Our provision for income taxes reflects the establishment of a full valuation allowance against deferred tax assets as of December 31, 2023, and 2022. Accounting Standards Codification Topic 740 Income Taxes requires management to evaluate its deferred tax assets on a regular basis to reduce them to an amount that is realizable on a more likely than not basis. During 2023, the valuation allowance decreased by approximately $
We have adopted the provisions of the guidance related to accounting for uncertainties in income taxes. We have analyzed our current tax reporting compliance positions for all open years and have determined that it does not have any material unrecognized tax benefits. Accordingly, we have omitted the tabular reconciliation schedule of unrecognized tax benefits. We do not expect a material change in unrecognized tax benefits over the next 12 months. All of our prior federal and state tax filings from the 2021 tax year forward remain open under statutes of limitation. Operating losses generated in years prior to 2021 remain open to adjustment until the statute closes for the tax year in which the net operating losses are utilized.
The Company’s provision for income taxes attributable to continuing operations differs from the expected tax benefit amount computed by applying the statutory federal income tax rate of
|
Year Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Federal statutory rate |
% |
% |
||||||
|
State tax, net of income tax benefit |
% |
( |
)% |
|||||
|
Change in state rates |
% |
% | ||||||
|
Effect of permanent differences |
% |
% |
||||||
|
Stock compensation |
% |
( |
)% |
|||||
|
Change in valuation allowance |
( |
)% |
( |
)% |
||||
|
Total |
% |
( |
)% |
|||||
|
Note 6 – |
Commitments and Contingencies |
For the years ended December 31, 2023 and 2022, rent expense included in selling, general and administrative expenses on the accompanying Consolidated Statement of Operations for operating leases was approximately $
In the normal course of business, we issue binding purchase orders to subcontractors and equipment suppliers. At December 31, 2023, these open purchase order commitments amount to approximately $
We are not a party to any material litigation in any court, and we are 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 such as employment-related matters. We believe that any potential 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.
|
Note 7 – |
Fair Value Measurements |
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of December 31, 2023, we did have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities, including goodwill and property and equipment, are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized.
|
Note 8 – |
Share-Based Payments |
In January 2007, our stockholders approved the Company’s 2006 Omnibus Incentive Compensation Plan, which was designed to attract, retain and motivate key employees. Under this plan, we reserved
The Plan is administered by the compensation committee of our Board of Directors. Subject to the express provisions of the Plan, the compensation committee has the Board of Directors' authority to administer and interpret the Plan, including the discretion to determine the form of grant, exercise price, vesting schedule, contractual life and the number of shares to be issued. We have historically issued restricted stock under the Plan; however, as further incentive to key employees, the Company also issued options to purchase shares of our common stock during the year ended December 31, 2023.
Stock-based Compensation Expense
For the years ended December 31, 2023 and 2022, we recognized stock-based compensation of approximately $
As of December 31, 2023, the total unrecognized compensation cost related to unvested restricted stock and options to purchase common stock was approximately $
Stock Options
Although we have historically issued restricted stock under the Plan, we also issued options to purchase shares of our common stock during the years ended December 31, 2023 and 2022. Option grants can have various vesting features but typically involve time-based vesting.
Fair Value Determination –We utilize a Black-Scholes-Merton model to value stock options vesting over time. We will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under these models.
Volatility -The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history corresponding to the expected term for Black-Scholes-Merton model.
Expected Term -Given the lack of historical experience, the expected term of options granted to employees was determined utilizing a plain vanilla approach whereby minimum or median time to vest and the contractual term of
Risk-free Interest Rate -The yield was determined based on U.S. Treasury rates corresponding to the expected term of the underlying grants.
Dividend Yield -The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. We currently do not anticipate paying dividends; therefore, the yield was estimated at .
The following table summarizes weighted-average assumptions used in our calculations of fair value for stock-option grants for the years ended December 31, 2023 and 2022:
|
Black-Scholes-Merton |
||||||||
|
2023 |
2022 |
|||||||
|
Volatility |
% | % | ||||||
|
Expected life of options (in years) |
||||||||
|
Risk-free interest rate |
% | % | ||||||
|
Dividend yield |
% | % | ||||||
During the year ended December 31, 2023 we granted stock options to purchase
The following table includes information with respect to stock option activity and stock options outstanding for the years ended December 31, 2023 and 2022:
| Weighted Average | ||||||||||||||||
|
Number |
Weighted |
Remaining |
Aggregate |
|||||||||||||
|
Of |
Average |
Contractual |
Intrinsic |
|||||||||||||
|
Shares |
Exercise Price |
Life (years) |
Value* |
|||||||||||||
|
Shares under option, January 1, 2022 |
$ | - | $ | |||||||||||||
|
Options granted |
$ | |||||||||||||||
|
Options exercised |
( |
) |
$ | |||||||||||||
|
Options cancelled and expired |
( |
) |
$ | ( |
) |
|||||||||||
|
Shares under option, December 31, 2022 |
$ | |||||||||||||||
|
Options granted |
$ | |||||||||||||||
|
Options exercised |
$ |
|||||||||||||||
|
Options cancelled and expired |
$ |
|||||||||||||||
|
Shares under option, December 31, 2023 |
$ | $ | ||||||||||||||
*Aggregate intrinsic value includes only those options with intrinsic value (options where the exercise price is below the market price).
The following table summarizes non-vested stock options for the years ended December 31, 2023 and 2022:
|
Weighted |
||||||||
|
Number of |
Average |
|||||||
|
Shares |
Fair Value |
|||||||
|
Non-vested stock options at January 1, 2022 |
$ | |||||||
|
Options granted |
$ | |||||||
|
Vested during period |
( |
) |
$ | ( |
) |
|||
|
Options cancelled |
$ | |||||||
|
Non-vested shares under option, December 31, 2022 |
$ | |||||||
|
Options granted |
$ | |||||||
|
Vested during period |
( |
) |
$ | ( |
) |
|||
|
Options cancelled |
$ | |||||||
|
Non-vested shares under option, December 31, 2023 |
$ | |||||||
The following table includes information concerning stock options exercisable and stock options expected to vest at December 31, 2023:
| Weighted Average |
Weighted |
|||||||||||||||
|
Remaining |
Average |
Aggregate |
||||||||||||||
|
Contractual |
Exercise |
Intrinsic |
||||||||||||||
|
Options |
Life (years) |
Price |
Value |
|||||||||||||
|
Stock options exercisable |
$ | $ | ||||||||||||||
|
Stock options expected to vest |
$ | $ | ||||||||||||||
|
Options exercisable and expected to vest |
||||||||||||||||
Restricted Stock
We have granted shares of restricted stock under the Plan. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted shares issued to employees typically vest over or years in equal installments on the anniversaries of the grant date, contingent upon employment with the Company on the vesting dates. The related compensation expense is recognized over the service period and is based on the grant date fair value of the stock and the number of shares expected to vest.
The fair value of restricted stock awarded for the years ended December 31, 2023, and 2022 was $
The following table summarizes the restricted stock activity during the years ended December 31, 2023, and 2022:
| Weighted
Average |
||||||||
|
Number of |
Grant Date |
|||||||
|
Shares |
Fair Value |
|||||||
|
Unvested January 1, 2022 |
$ | |||||||
|
Granted restricted stock |
$ | |||||||
|
Cancelled restricted stock |
( |
) |
$ | ( |
) |
|||
|
Vested restricted stock |
( |
) |
$ | ( |
) |
|||
|
Unvested December 31, 2022 |
$ | |||||||
|
Granted restricted stock |
$ | |||||||
|
Cancelled restricted stock |
( |
) |
$ | ( |
) |
|||
|
Vested restricted stock |
( |
) |
$ | ( |
) |
|||
|
Unvested December 31, 2023 |
$ | |||||||
|
Note 9 – |
Common Stock Repurchases |
During the years ended December 31, 2023, and 2022, we repurchased
|
Note 10 – |
Related Party Transactions |
We had the following related party balances that are included in our Consolidated Statement of Operations (in ’000’s):
|
Related party transactions: (in ’000’s) |
Years Ended December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
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 11 – |
Net Income (Loss) Per-Share |
Basic and diluted income (loss) per share is based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purpose of determining diluted income per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.
The following table presents a reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for income from continuing operations. In the table below, income (loss) represents the numerator and shares represent the denominator (in thousands except per share amounts):
|
Years Ended |
||||||||
|
December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Basic net income (loss) per share: |
||||||||
|
Numerator: |
||||||||
|
Net income (loss) |
$ | $ | ( |
) | ||||
|
Denominator: |
||||||||
|
Weighted-average shares of common stock outstanding |
||||||||
|
Basic net income (loss) per share |
$ | $ | ( |
) | ||||
|
Diluted net income (loss) per share: |
||||||||
|
Numerator: |
||||||||
|
Net income (loss) |
$ | $ | ( |
) | ||||
|
Denominator: |
||||||||
|
Weighted-average shares of common stock outstanding |
||||||||
|
Dilutive options and warrants outstanding |
||||||||
|
Number of shares used in diluted per-share computation |
||||||||
|
Diluted net income (loss) per share |
$ | $ | ( |
) | ||||
For the years ended December 31, 2023 and 2022,
|
Note 12 - |
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. All of our revenues are derived from the U.S. market. Segment operating results reflect earnings before stock-based compensation, acquisition-related expenses, other expenses, net, and provision for income taxes.
Revenue and operating result by reportable segment reconciled to reportable net loss for the years ended December 31, 2023 and 2022 and other segment-related information is as follows (in thousands):
|
Year Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Revenues: |
||||||||
|
Facilities |
$ | $ | ||||||
|
Systems integration services |
||||||||
|
Total revenues |
$ | $ | ||||||
|
Operating income (loss): |
||||||||
|
Facilities |
$ | $ | ||||||
|
Systems integration services |
( |
) | ||||||
|
Operating income (loss) |
$ | $ | ||||||
|
Depreciation and amortization expense: |
||||||||
|
Facilities design and maintenance |
$ | $ | ||||||
|
Systems integration services |
||||||||
|
Consolidated depreciation and amortization expense |
$ | $ | ||||||
|
Interest expense, net |
||||||||
|
Facilities design and maintenance |
$ | $ | ||||||
|
Systems integration services |
||||||||
|
Consolidated interest expense, net |
$ | $ | ||||||
|
Total Assets |
||||||||
|
Facilities |
$ | $ | ||||||
|
Systems integration services |
||||||||
|
Other consolidated activities |
||||||||
|
Total assets |
$ | $ | ||||||
Other consolidated activities includes assets not specifically attributable to each business segment including cash, prepaid and other assets that are managed at a corporate level.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Information required by this item regarding our directors, executive officers and corporate governance matters may be found under the caption “Management and Corporate Governance” in our Proxy Statement relating to our 2024 Annual Meeting of Stockholders (the “2024 Proxy Statement”) to be filed with the SEC within 120 days of December 31, 2023 and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this item is included under the captions “Management and Corporate Governance,” and “Executive Officer and Director Compensation” in the 2024 Proxy Statement and incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2024 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is included under the captions “Related Person Transactions” and “Management and Corporate Governance” in the 2024 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item is included under the caption “Independent Registered Public Accounting Firms” in the 2024 Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report:
|
1. |
Financial Statements: |
The following consolidated financial statements of TSS, Inc. for each of the years ended December 31, 2023 and 2022 are submitted in Part II, Item 8. Financial Statements and Supplementary Data of this report:
|
Description |
Page |
|||
|
Consolidated Balance Sheets - December 31, 2023 and 2022 |
26 |
|||
|
Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 |
27 |
|||
|
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 |
28 |
|||
|
Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 |
29 |
|||
|
Notes to Consolidated Financial Statements |
30 |
|||
|
2. |
Financial Statements Schedules: |
None.
|
3. |
Exhibits: |
|
3.1 |
|
|
3.2 |
|
|
3.3 |
|
|
3.4 |
|
|
4.1 |
|
21.1* |
|
|
23.1* |
|
|
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 (embedded within the Inline XBRL and contained in Exhibit 101) |
|
‡ |
Management contract or compensatory plan or arrangement. |
|
* |
Filed herewith. |
|
** |
Furnished herewith. |
Item 16. Form 10-K Summary
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
TSS, Inc. |
||
|
Date: March 28, 2024 |
By: |
/s/ Darryll Dewan |
|
Darryll Dewan |
||
|
Chief Executive Officer |
||
|
(Principal Executive Officer) |
||
|
Date: March 28, 2024 |
By: |
/s/ John K. Penver |
|
John K. Penver |
||
|
Chief Financial Officer |
||
|
(Principal Financial Officer) |
||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities indicated on March 28, 2024.
|
Signature |
Title |
|
|
/s/ Peter H. Woodward |
Chairman of the Board |
|
|
Peter H. Woodward |
||
|
/s/ Darryll Dewan |
Chief Executive Officer and Director |
|
|
Darryll Dewan |
(Principal Executive Officer) |
|
|
/s/ John K. Penver |
Chief Financial Officer |
|
|
John K. Penver |
(Principal Financial Officer and Accounting Officer) |
|
|
/s/ Richard M. Metzler |
Director |
|
|
Richard M. Metzler |
Exhibit 10.34
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this “Agreement”), effective this 26th day of October 2022 (“Effective Date”), is made and entered into between TSS, INC., a Delaware corporation (the “Company”), and TODD MARROTT (the “Employee”).
NOW, THEREFORE, in exchange for the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Employee, each intending to be legally bound, hereby mutually covenant and agree as follows:
|
1. |
DEFINITIONS |
The following words and terms shall have the meanings set forth below for the purposes of this Agreement:
1.1. Board. “Board” means the Company’s Board of Directors.
1.2. Cause. The following constitutes “Cause” giving rise to the Company’s right to terminate the Employee’s employment under Section 4.1 of this Agreement: (a) the Employee’s willful failure to perform, or gross negligence in the performance of, his duties and responsibilities to the Company and its Subsidiaries; (b) any act that would constitute a material violation of the Company’s written policies; (c) intentionally engaging in conduct injurious to the Company; (d) conviction of (1) a crime of embezzlement or a crime involving moral turpitude; (2) a crime with respect to the Company involving a breach of trust or dishonesty; or (3) in either case, a plea of guilty or no contest to such a crime; or (e) the Employee’s violation of his obligations under Section 5 of this Agreement or by his breach of a fiduciary duty owed the Company or any of its Subsidiaries.
1.3. Date of Termination. “Date of Termination” means (a) if the Employee’s employment is terminated by reason of the Employee’s death, the date of the Employee’s death, or (b) if the Employee’s employment with the Company is terminated for any reason other than the Employee’s death, the date on which Employee ceases to be an employee of the Company.
1.4. Disability. Termination of the Employee’s employment with the Company based on “Disability” means termination of the Employee’s employment at the Company’s sole discretion, upon thirty (30) days prior written notice in the event the Employee becomes “Disabled,” as defined in any group term disability insurance maintained by the Company applicable to the Employee, or, (b) if the Company shall not maintain such insurance, the determination by an independent physician acting reasonably and in good faith that the Employee is incapacitated by reason of a physical or mental illness that is long-term in nature and that prevents the Employee from performing the substantial and material duties of his employment with the Company, provided that such incapacity can reasonably be expected to prevent the Employee from working at least six (6) months in any twelve (12) month period. The Company may require the Employee to have the examination described in the preceding sentence at any time for the purpose of determining whether the Employee has a long-term disability, and the Employee agrees to submit to such examination upon request of the Board; provided that the Company shall pay all costs and expenses associated with such examination. This Section 1.4 shall be interpreted and applied consistently with the Americans with Disabilities Act, the Family and Medical Leave Act and other applicable law.
1.5. Good Reason. Termination of the Employee’s employment by the Employee for a “Good Reason” shall mean termination by the Employee because of: (a) any other breach or breaches of this Agreement by the Company, which breaches are, singularly or in the aggregate, material, and which are not cured within thirty (30) days of written notice of such breach or breaches to the Company by the Employee; or (b) a reduction by the Company of the Employee’s Base Salary without the express written consent of the Employee other than a general reduction in Base Salary that affects all similarly situated employees in substantially the same proportions.
1.6. Person. “Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, any other business entity and a governmental entity or any department, agency or political subdivision thereof.
1.7. Restrictive Period. “Restrictive Period” means the twelve (12) month period measured from the Termination Date through the date that is twelve (12) months following the Date of Termination.
1.8. Subsidiary. “Subsidiary” means any corporation, limited liability company, partnership, association or other business entity of which (a) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or one or more of the other Subsidiaries or a combination thereof, or (b) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by the Company or one or more Subsidiaries or a combination thereof. For purposes hereof, the Company shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if the Company shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity.
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2. |
EMPLOYMENT |
2.1. Employment Period.
2.1.1 The Company hereby employs the Employee, and the Employee hereby accepts said employment and agrees to render services to the Company, on the terms and conditions set forth in this Agreement for the period commencing on the Effective Date and ending on December 31, 2023 (the “Expiration Date ”), unless sooner terminated in accordance with the provisions herein (such period is the “Employment Period”); provided, however, that if this Agreement is renewed pursuant to Section 2.1.2 of this Agreement, then the “Expiration Date” for the then current “Renewal Term” (as hereinafter defined) shall be the date that is last day of the one year period of any Renewal Term.
2.1.2 This Agreement shall be automatically renewed for an additional one year period commencing at the expiration of the initial Employment Period or any subsequent renewal term (each, a “Renewal Term”) unless the Company provides written notice of termination to the Employee not less than thirty (30) days prior to the Expiration Date. Notwithstanding the foregoing or anything else in this Agreement to the contrary, the Employment Period shall immediately terminate prior to any Expiration Date (i) upon Employee’s death, Disability or termination for a Good Reason or (ii) upon termination by the Company for Cause. In all other circumstances, thirty (30) days’ prior written notice is required by either party to the other to terminate this Agreement.
2.2. Duties. During the Employment Period, the Employee shall have the title Senior Vice President-Operations and shall report to the Company’s Chief Executive Officer. It is anticipated that Employee will be promoted to the position of Chief Operating Officer of Company on or before December 31, 2023. This promotion will be based on employee’s performance and completion of agreed critical projects and will be subject to the Company’s financial performance and condition at such time. The Company and the Employee will consider reasonable modifications to this Agreement if the Employee is promoted to Chief Operating Officer. The Employee shall perform such services for the Company as is consistent with the Employee’s position (subject to the power and authority of the Board to expand or limit such services and to overrule actions of officers of the Company) and as lawfully directed, from time to time, by the Company’s Chief Executive Officer or the Board. The Employee shall devote the Employee’s full working time and attention and use the Employee’s best efforts and skill to the performance of the Employee’s duties under this Agreement. The Employee shall not, during the Employment Period, provide services to any business activity for gain, profit or other pecuniary advantage other than the services provided under this Agreement. The Employee acknowledges that the Employee may be required to travel on business in connection with the Employee’s performance of the Employee’s duties hereunder.
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3. |
COMPENSATION AND BENEFITS |
3.1. Base Salary. During the Employment Period, the Company shall pay the Employee an initial base salary of Two Hundred and Fifty Thousand Dollars ($250,000.00) per year (“Base Salary”) paid in approximately equal installments bi-weekly.
3.2. Annual Bonus. For each calendar year that begins during the Employment Period (each such calendar year, a “Bonus Year”), the Employee shall be eligible to receive a bonus in an amount and on such terms as are established by the Board in its sole discretion. Without limiting the generality of the foregoing, the Employee’s target annual bonus for the 2023 Bonus Year shall equal 25% of the Base Salary on terms established by the Board for such Bonus Year. Any bonus for an applicable calendar year, or portion thereof, shall be paid to the Employee no later than March 15th of the calendar year following the Bonus Year.
3.3. Relocation Allowance. Subject to the terms of the Company’s standard Relocation and Moving Expense Agreement, the Company will provide the Employee a relocation allowance of up to One-Hundred Thousand Dollars ($100,000.00) for personal moving and relocation expenses incurred for relocation in connection with this employment, to include travel to and from the Company (and all related travel expense) before and during relocation. Consistent with the Company’s standard Relocation and Moving Expense Agreement, Employee will provide documentation and proof of incurrence of all related expenses. Employee agrees that if Employee terminates his employment relationship with the Company prior to the first anniversary of the Effective Date, Employee agrees to repay in full to the Company all amounts received under this Relocation Agreement.
3.4 Vacation and Benefits. The Employee shall receive vacation, health insurance and other employee benefits as the Company makes available to other similarly situated employees, as may exist at any particular time and from time to time during the Employee’s employment. All matters of eligibility for coverage or benefits under any health, hospitalization, life, disability, or other insurance plan, program or policy shall be determined in accordance with the provisions of the plan, program, or policy; and the Company shall not be liable to the Employee, the Employee’s family, heirs, executors, or beneficiaries for any payment payable or claimed to be payable under any such benefit plan, program, or policy.
3.5. Withholding. All payments required to be made by the Company hereunder to the Employee shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.
3.6. Policies, Procedures & Benefit Plans. Except as otherwise provided herein, the Employee’s employment shall be subject to the policies and procedures that apply generally to the Company’s employees as the same may be interpreted, adopted, revised or deleted from time to time, during the Employment Period, by the Board in its sole discretion. The Employee agrees to comply with such policies and procedures in all material respects.
3.7. Equity. On the Effective Date, the Employee shall receive options to purchase 200,000 shares of the Company’s common stock and 100,000 shares of restricted stock upon the terms and conditions set forth in that certain Award Agreement, dated as of the Effective Date, between the Company and the Employee.
3.8. Expenses. During the Employment Period, including following any Date of Termination for appropriate expenses incurred on or prior to the Date of Termination, the Company shall reimburse the Employee promptly or otherwise provide for or pay for all pre-approved reasonable expenses incurred by the Employee in furtherance of, or in connection with, the business of the Company or its Subsidiaries, consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to such reasonable documentation and other limitations as may be established from time to time by the Board, including against presentation of vouchers or receipts therefor.
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4. |
TERMINATION |
4.1. Termination Due to Death or Disability, By the Company For Cause or By the Employee. If the Employment Period is terminated (a) by reason of the Employee’s Death or Disability; (b) by the Company for Cause; (c) by the Employee (other than for a Good Reason); or (d) by the Company or the Employee for any reason (including for a Good Reason) before the first anniversary of the Effective Date; then the Employee shall only be entitled to receive the Employee’s Base Salary and the reimbursement of any applicable expenses pursuant to Section 3.8 of this Agreement through the Date of Termination, and the Employee shall have no right to any other compensation thereafter (including without limitation pursuant to Section 3.1 and Section 3.2 of this Agreement, but not including Section 4.3 of this Agreement). No Person shall be entitled hereunder to participate in any employee benefit plan after the Date of Termination if the Employment Period is terminated in connection with this Section 4.1, except as otherwise expressly required by applicable law (i.e., COBRA) and provided that nothing herein shall be interpreted to limit the Employee’s conversion rights, if any, under any of the Company’s employee benefit plans.
4.2. Termination By the Company Other Than for Cause or By the Employee for a Good Reason. In addition to the payment to the Employee of the Employee’s Base Salary and the reimbursement of any applicable expenses pursuant to Section 3.8 of this Agreement through the Date of Termination, if (a) after the first anniversary of the Effective Date the Employment Period is terminated (i) by the Company other than for Cause, (ii) by the Employee for a Good Reason, (iii) by the Company in accordance with Section 2.1.2 of this Agreement by providing the requisite notice to the Employee to terminate this Agreement prior to any Expiration Date; and (b) the Employee executes a general release in substantially the form attached hereto as Exhibit A (the “Release”) on or before the Date of Termination; then the Company shall continue paying the Employee salary payments based on the Base Salary (at the rate in effect at the Date of Termination) for a period commencing on the Date of Termination and ending six (6) months from the Date of Termination.
Further, In addition to the payment to the Employee of the Employee’s Base Salary and the reimbursement of any applicable expenses pursuant to Section 3.8 of this Agreement through the Date of Termination, if (a) prior to the first anniversary of the Effective Date the Employment Period is terminated by the Company other than for Cause and following a significant change in executive leadership of the Company; and (b) the Employee executes a general release in substantially the form attached hereto as Exhibit A (the “Release”) on or before the Date of Termination; then the Company shall continue paying the Employee salary payments based on the Base Salary (at the rate in effect at the Date of Termination) for a period commencing on the Date of Termination and ending six (6) months from the Date of Termination.
Any payment under this Section 4.2 shall be made in accordance with the Company’s normal payroll schedule at the time the payments are made. The Employee shall be entitled to receive the benefits under any plan or program adopted or sponsored by the Company or its Subsidiaries (to the extent the Employee participates and is vested in such benefits) in accordance with the terms of such plan or program. If the Employee elects and remains eligible for health coverage pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended (“COBRA”) (and subject to withholding pursuant to Section 3.5 of this Agreement), then commencing within fifteen (15) business days following the date on which the Release becomes effective pursuant to its terms, the Company will, for a period commencing on the Date of Termination and ending six (6) months from the Date of Termination if the Date of Termination occurs after the first anniversary of the Effective Date, pay a percentage of the premium for such COBRA health coverage equal to the percentage of the premium for health insurance coverage paid by the Company on the Date of Termination. The Employee shall not be entitled to any other salary or compensation after termination of the Employment Period under this Section 4.2 (other than as set forth in this Section 4.2 and Section 4.3 of this Agreement). No Person shall be entitled hereunder to participate in any employee benefit plan after the Date of Termination if the Employment Period is terminated in connection with this Section 4.2, except as otherwise specifically provided hereunder or as required by applicable law (i.e., COBRA) and provided that nothing herein shall be interpreted to limit the Employee’s conversion rights, if any, under any of the Company’s employee benefit plans.
4.3. Cooperation with Company after Termination of Employment. For a period of six (6) months following termination of the Employment Period for any reason, as such period may be extended with the consent of the Employee, the Employee shall fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company including, but not limited to, any litigation in which the Company is involved, and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. The Employee shall be compensated for any time spent pursuant to this Section 4.3 at the specific request of the Company at a per diem amount based upon the Employee’s Base Salary at the Date of Termination.
4.4. Termination by Mutual Consent. Notwithstanding any of the foregoing provisions of this Section 4, if at any time during the course of this Agreement the parties by mutual consent decide to terminate the Employment Period, they shall do so by separate agreement setting forth the terms and conditions of such termination.
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5. |
NON-SOLICITATION OF CUSTOMERS OR EMPLOYEES; NON-COMPETITION; CONFIDENTIALITY |
5.1. Covenant Not-to-Solicit Customers. During the Employment Period and the Restrictive Period, the Employee shall not directly or indirectly, individually or on behalf of any Person, whether as principal, agent, stockholder, employee, consultant, representative or in any other capacity, that engages in a Competitive Activity (as defined below) in any geographic area in which the Company actively markets or in which the Employee knows the Company intends to actively market, solicit any Person that:
(a) is a customer or client of the Company or any of its Subsidiaries that the Employee had dealings with by virtue of the Employee’s employment with the Company as of the Date of Termination;
(b) has been a customer or client of the Company or any of its Subsidiaries that the Employee had dealings with by virtue of the Employee’s employment with the Company at any time within two (2) years prior to the Date of Termination; or
(c) is a prospective customer or client that the Employee had been actively soliciting with, or on behalf of, the Company or any of its Subsidiaries as of the Date of Termination.
5.2. Covenant Not-to-Solicit Employees. During the Employment Period and the Restrictive Period, the Employee shall not directly or indirectly, individually or on behalf of any other Person, whether as principal, agent, stockholder, employee, consultant, representative or in any other capacity:
(a) recruit, solicit or encourage any person to leave the employ of the Company or any of its Subsidiaries; or
(b) hire any employee of the Company or any of its Subsidiaries as a regular employee, consultant, independent contractor or otherwise.
5.3. Non-Competition. The Employee recognizes and acknowledges the competitive and proprietary nature of the business operations of the Company and its Subsidiaries. During the Employment Period and the Restrictive Period, the Employee shall not, without the prior written consent of the Company, for himself or on behalf of any Person, directly or indirectly, whether as principal, agent, stockholder, employee, consultant, representative or in any other capacity, own, manage, operate or control, or be concerned, connected or employed by, or otherwise associate in any manner with, engage in or have a financial interest in any business that engages in a Competitive Activity in any geographic area in which the Company actively markets or in which the Employee knows the Company intends to actively market. For purposes of this Agreement, “Competitive Activity” means the design, development, manufacture, marketing, or sale of any product or service that is in competition with any product or service designed, developed, manufactured, marketed, or sold by the Company or any of its Subsidiaries on the Date or Termination or with respect to which the Company or its Subsidiaries has acquired or developed, prior to the Date of Termination, confidential information that it intends to use in the design, development, manufacture, marketing, or sale of a product or service. The parties acknowledge that the Company or its Subsidiaries may from time to time during the term of this Agreement change or increase the types of products or services it provides and its geographic markets, and this Agreement shall be deemed to be amended from time to time to include such different products, services, or geographic markets for the purposes of this Section 5.3. Nothing contained herein shall preclude the Employee from purchasing or owning stock in any such competitive business if such stock is publicly traded, and provided that his holdings do not exceed one percent (1%) of the issued and outstanding capital stock of such business.
5.4. Non-Disparagement. The Employee shall not make any public statement, or engage in any conduct, that is disparaging to the Company, or any of its employees, officers, directors or stockholders, including, but not limited to, any statement that disparages the products, services, finances, financial condition, capabilities or other aspects of the business of the Company. Notwithstanding any term to the contrary herein, the Employee shall not be in breach of this Section 5 for the making of any truthful statements under oath.
5.5. Confidentiality. The Employee understands and acknowledges that the Company has invested, and continues to invest, substantial time, money and specialized knowledge into developing its resources, creating a customer base, generating customer and potential customer lists, training its employees, and improving its offerings in connection with the operation of its business. For purposes of this Agreement, “Confidential Information” includes, but is not limited to, all information not generally known to the public, in spoken, printed, electronic or any other form or medium, relating directly or indirectly to the Company, its Subsidiaries, or their respective businesses or any existing or prospective customer, supplier, investor or other associated third party, or of any other person or entity that has entrusted information to the Company or its Subsidiaries in confidence. The Employee understands that Confidential Information also includes other information that is marked or otherwise identified as confidential or proprietary, or that would otherwise appear to a reasonable person to be confidential or proprietary in the context and circumstances in which the information is known or used. The Employee understands and agrees that Confidential Information includes information developed by him in the course of his employment by the Company as if the Company furnished the same Confidential Information to the Employee in the first instance. Confidential Information shall not include information that is or becomes generally available to and known by the public through no direct or indirect fault of the Employee or person(s) acting at the Employee’s direction.
5.5.1 The Employee agrees and covenants: (A) to treat all Confidential Information as strictly confidential; (B) not to directly or indirectly disclose, publish, communicate or make available Confidential Information, or allow it to be disclosed, published, communicated or made available, in whole or part, to any entity or person whatsoever (including other employees of the Company and its subsidiaries) not having a need to know and authority to know and use the Confidential Information in connection with the business of the Company and is subsidiaries and, in any event, not to anyone outside of the direct employ of the Company except as required in the performance of the Employee’s authorized employment duties to the Company or with the prior consent of the Company in each instance (and then, such disclosure shall be made only within the limits and to the extent of such duties or consent); and (C) not to access or use any Confidential Information, and not to copy any documents, records, files, media or other resources containing any Confidential Information, or remove any such documents, records, files, media or other resources from the premises or control of the Company and its Subsidiaries, except as required in the performance of the Employee’s authorized employment duties to the Company or with the prior consent of the Company in each instance (and then, such disclosure shall be made only within the limits and to the extent of such duties or consent). Nothing herein shall be construed to prevent disclosure of Confidential Information as may be required by applicable law or regulation, or pursuant to the valid order of a court of competent jurisdiction or an authorized government agency, provided that the disclosure does not exceed the extent of disclosure required by such law, regulation or order. The Employee shall promptly provide written notice of any such order to the Company.
5.5.2. The Employee understands and acknowledges that his obligations under this Agreement with regard to any particular Confidential Information shall commence immediately upon the Employee first having access to such Confidential Information (whether before or after he begins employment by the Company) and shall continue during and after his employment by the Company until such time as such Confidential Information has become public knowledge other than as a result of the Employee’s breach of this Agreement or breach by those acting in concert with the Employee or on the Employee’s behalf.
5.6. Reasonableness of Restrictions. The Employee has carefully read and considered the provisions of this Section 5, and, having done so, agrees (a) that the restrictions set forth herein are reasonable, in terms of scope, duration, geographic area, and otherwise, (b) that the protection afforded to the Company hereunder is necessary to protect its legitimate business interests, (c) that the agreement to observe such restrictions form a material part of the consideration for this Agreement and the Employee’s employment by the Company and (d) that upon the termination of the Employee’s employment with the Company for any reason, he will be able to earn a livelihood without violating the foregoing restrictions. In the event that, notwithstanding the foregoing, any of the provisions of this Section 5 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein. In the event that any provision of this Section 5 relating to the time period and/or the areas of restriction and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or areas of restriction and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court. The Restrictive Period shall be computed by excluding from such computation any time during which the Employee is in violation of any provision of this Section 5.
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6. |
EMPLOYEE’S REPRESENTATIONS AND WARRANTIES |
6.1. No Breach; No Conflict of Interest. The Employee hereby represents and warrants to the Company that (a) the execution, delivery and performance of this Agreement by the Employee do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Employee is a party or by which the Employee is bound and (b) the Employee is not, to the best of the Employee's knowledge and belief, involved in any situation that might create, or appear to create, a conflict of interest with loyalty to or duties for the Company.
6.2. Notification of Materials or Documents from Other Employers. The Employee hereby represents and warrants to the Company that the Employee has not brought and will not bring to the Company or use in the performance of responsibilities at the Company any materials or documents of a former employer or client that are not generally available to the public, unless the Employee has obtained express written authorization from the former employer or client and the Company for their possession and use.
6.3. Notification of Other Post-Employment Obligations. The Employee also understands that, as part of the Employee’s employment with the Company, the Employee is not to breach any obligation of confidentiality that the Employee has to former employers or clients, and agrees to honor all such obligations to former employers or clients during employment with the Company.
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7. |
ARBITRATION |
7.1. Claims. The Employee and the Company mutually consent to the resolution by arbitration of certain claims or controversies (collectively, “Claims”) arising out of or relating to the Employee’s employment or termination of employment under this Agreement that either party may have against the other, including the Company’s officers, stockholders, directors, employees, or benefit plans, the benefit plans’ sponsors, fiduciaries, administrators, or affiliates; and all successors and assigns of any of them, or agents in their capacity as such or otherwise. Claims covered by this Agreement shall include claims for (a) wages or other compensation due; (b) breach of any contract or covenant (express or implied); (c) tort claims; (d) discrimination (including but not limited to race, sex, religion, national origin, age, disability, citizenship, marital status, or any other basis protected by any applicable federal, state or local law); (e) payment of wages; (f) benefits (except where an employee benefit or pension plan specifies that its claims procedure shall use an arbitration procedure different from this one); and (g) violation of any federal, state, or local law, statute, regulation, or ordinance, or recognized under common law. The Claims not covered by this Agreement shall include claims (h) for workers’ compensation or unemployment compensation benefits; (i) brought pursuant to Section 8 of this Agreement and breach of duty of loyalty; and (j) unrelated to the Employee’s employment with the Company.
7.2. Procedures. The arbitration shall be governed by the procedures of the American Arbitration Association in accordance with its then-current Model Employment Arbitration Procedures and shall take place in the Austin, Texas metropolitan area.
7.3. Legal Fees. If the parties to this Agreement become parties to an arbitration proceeding or litigation arising from or relating to this Agreement, the non-prevailing party shall pay the reasonable attorneys’ fees and costs incurred by the prevailing party in such arbitration or litigation.
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8. |
GENERAL PROVISIONS |
8.1. Assignment. The Company may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any Person with or into which the Company may hereafter merge or consolidate or to which the Company may transfer all or substantially all of its assets, if in any such case said Person shall by operation of law or expressly in writing assume all obligations of the Company hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Employee may not assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the Company.
8.2. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, or Federal Express, signature required, if to the Company, addressed to its corporate headquarters at the time notice is given, “Attention: Chief Executive Officer”; if to the Employee, addressed to his home address as listed in the Company’s records at the time notice is given.
8.3. Amendment and Waiver. No provision of this Agreement may be amended or waived unless such amendment or waiver is in writing and signed by each of the parties hereto. Any such amendment shall comply with the requirements of Section 409Aof the Code, if applicable.
8.4. Non-Waiver of Breach. No failure by either party to declare a default due to any breach of any obligation under this Agreement by the other, nor failure by either party to act quickly with regard thereto, shall be considered to be a waiver of any such obligation, or of any future breach.
8.5. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason and subject to Section 5.6 of this Agreement, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
8.6. Governing Law. To the extent not preempted by Federal law, the validity and effect of this Agreement and the rights and obligations of the parties hereto shall be construed and determined in accordance with the law of the State of Texas, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas.
8.7. Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter, whether oral or written, which shall be null and void and of no further force or effect.
8.8. Binding Effect; Third Party Beneficiaries. This Agreement shall be binding upon and shall inure to the benefit of the transferees, successors and assigns of the Company, including without limitation any Person with which the Company may merge or consolidate. The Company’s Subsidiaries are express third party beneficiaries of this Agreement, including the provisions of Section 5 of this Agreement.
8.9. Headings. Numbers and titles to Sections hereof are for information purposes only and, where inconsistent with the text, are to be disregarded.
8.10. Survival. Section 1 and Sections 4 through 8 of this Agreement shall survive and continue in full force in accordance with their terms notwithstanding the expiration or termination of the Employment Period.
8.11. No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.
8.12. Counterparts. This Agreement may be executed in separate counterparts (including by means of facsimile), each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
8.13. Injunctive Relief. The Employee represents and acknowledges that, in light of the payments to be made by the Company to the Employee hereunder and for other good and valid reasons, as a result of the restrictions stated in the Assignment Agreement and the restrictions in Section 5 of this Agreement, the Company and its Subsidiaries would sustain irreparable harm and, therefore, in addition to any other remedies which the Company or its Subsidiaries may have under this Agreement or otherwise, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining the Employee from committing or continuing any such violation of this Agreement, and the Employee shall not object to such application.
8.14. Section 409A and Tax Matters. This Agreement is intended to meet the requirements to avoid being subject to the additional taxes imposed on deferred compensation under Section 409A of the Code and shall be construed and interpreted in accordance with such intent. No person connected with the Agreement in any capacity, including but not limited to the Company and any Subsidiary and their respective directors, officers, agents and employees, makes any representation, commitment or guarantee that any tax treatment, including but not limited to federal, state and local income, estate and gift tax treatment, will be applicable with respect to any amounts payable under the Agreement or that such tax treatment will apply to or be available to the Employee on account of participation in the Agreement. In no event whatsoever shall the Company or any Subsidiary be liable for any additional tax, interest, or penalties that may be imposed on Employee as a result of Section 409A of the Code or any damages for failing to comply with Section 409A of the Code (other than for withholding obligations or other obligations applicable to employers, if any, under Section 409A of the Code).
[Signatures on next page]
IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be duly executed on the date and year first written above.
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THE COMPANY: |
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TSS, INC. |
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By: |
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| Anthony Angelini | ||
| Chief Executive Officer | ||
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THE EMPLOYEE: |
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Todd Marrott |
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EXHIBIT A
SEPARATION FROM EMPLOYMENT AGREEMENT AND RELEASE
1. This Separation from Employment Agreement and Release (this “Agreement”) is between the Employee, Todd Marrott, the Employee’s spouse, family, agents and attorneys) (jointly, the “Employee”) and TSS, Inc. (the “Company”), its subsidiaries, affiliated entities, direct or indirect owners and its and their respective officers, directors, employees, agents, predecessors, successors, purchasers, assigns, representatives, fiduciaries, and insurers (jointly, the "Released Parties").
2. If the Employee signs this agreement and does not revoke it, the Employee will receive the applicable severance payments and benefits set forth in Section 4 of that certain Employment Agreement, effective as of October __ , 2022 (the “Employment Agreement”).
3. The Employee, deeming this Agreement to be fair, reasonable, and equitable, and intending to be legally bound hereby, agrees to and hereby does, forever and irrevocably fully waive the Employee’s right to assert any and all forms of legal claims against the Released Parties, of any kind whatsoever, whether known or unknown, arising from the beginning of time through the date the Employee execute this Agreement (the “Execution Date”). Except as set forth below, the Employee’s waiver and release herein is intended to bar any form of legal claim, complaint or any other form of action (jointly referred to as “Claims”) against the Released Parties seeking any form of relief including, without limitation, equitable relief (whether declaratory, injunctive or otherwise), the recovery of any damages, or any other form of monetary recovery whatsoever (including, without limitation, back pay, front pay, compensatory damages, emotional distress damages, punitive damages, attorneys’ fees and any other costs) against the Released Parties, for any alleged action, inaction or circumstance existing or arising through the Execution Date.
Without limiting the foregoing general waiver and release, the Employee specifically waives and releases the Released Parties from any Claim arising from or related to the Employee’s employment relationship with the Released Parties or the termination thereof, including, without limitation:
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Claims under any state or federal discrimination, fair employment practices or other employment related statute, regulation or executive order (as they may have been amended through the Execution Date) prohibiting discrimination or harassment based upon any protected status including, without limitation, race, national origin, age, gender, marital status, disability, veteran status or sexual orientation. Without limitation, specifically included in this paragraph are any Claims arising under the Civil Rights Acts of 1866 and 1871, Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act, the Age Discrimination in Employment Act and any similar Texas or other state statute. |
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Claims under any other state or federal employment related statute, regulation or executive order (as they may have been amended through the Execution Date) relating to other terms and conditions of employment. Without limitation, specifically included in this paragraph are any Claims arising under the Employee Retirement Income Security Act of 1974, the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) and any similar state statute. |
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Claims under any state or federal common law theory including, without limitation, wrongful discharge, breach of express or implied contract, promissory estoppel, unjust enrichment, breach of a covenant of good faith and fair dealing, violation of public policy, defamation, interference with contractual relations, intentional or negligent infliction of emotional distress, invasion of privacy, misrepresentation, deceit, fraud or negligence. |
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Any right to recover from any complaints, charges or lawsuits filed by any federal or state agency on the Employee’s behalf. |
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Any other Claim arising under state or federal law. |
4. Notwithstanding the foregoing, this Agreement does not:
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release the Released Parties from any obligation expressly set forth in this Agreement or from any obligation, including without limitation obligations under the Workers Compensation laws, which as a matter of law cannot be released; |
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prohibit the Employee from filing a charge with the Equal Employment Opportunity Commission (“EEOC”); |
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prohibit the Employee from participating in an investigation or proceeding by the EEOC or any comparable state or local agency; or |
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prohibit the Employee from challenging or seeking a determination in good faith of the validity of this release or waiver under the Age Discrimination in Employment Act and does not impose any condition precedent, penalty, or costs for doing so unless specifically authorized by federal law. |
5. The Employee understands that this Agreement is not an admission of liability under any statute or otherwise by the Released Parties, and that the Released Parties do not admit, but deny, any violation of Employee’s legal rights, and that Employee shall not be regarded as a prevailing party for any purpose, including but not limited to, determining responsibility for or entitlement to attorneys’ fees, under any statute or otherwise. The Employee agrees that in the event the Employee brings a Claim in which the Employee seeks damages or other relief from any Released Party, or in the event the Employee seeks to recover against any Released Party in any Claim brought by a governmental agency on the Employee’s behalf, this Agreement shall serve as a complete defense to such Claims.
6. The Employee agrees that the Employee has been paid for all hours worked, including any overtime bonus or other incentive compensation, has submitted all invoices and expense reports, and has not suffered any on-the-job injury for which the Employee has not already filed a claim.
7. The Employee agrees that every term of this Agreement, including, but not limited to, the fact that an agreement has been reached and the amount paid, shall be treated by the Employee as strictly confidential, and expressly covenants not to display, publish, disseminate, or disclose the terms of this Agreement to any person or entity other than the Employee’s immediate family, the Employee’s attorney(s) (for purposes of seeking advice concerning this agreement only) and the Employee’s accountant(s) (for purposes of seeking tax advice only), unless compelled to make disclosure by lawful court order or subpoena.
8. The Employee and the Company have entered into an Invention Assignment and Confidentiality Agreement (the “Assignment Agreement”). The Employee reaffirms his obligation to comply with all of the post-termination obligations in the Assignment Agreement.
9. The Employee also agrees that:
☐ The Employee is entering into this agreement knowingly and voluntarily;
☐ The Employee has been advised by the Company to consult an attorney;
☐ As set forth in Attachment A, the Employee has been given the right to take 21 days (the “Consideration Period”) to consider this agreement; provided, however the Employee and the Company hereby agree that if there is a dispute as to the payment of wages such that the Employee is unable to make the representation set forth in Section 6 as to payment for hours worked (including any overtime bonus or other incentive compensation), the Consideration Period shall terminate on the later of the natural expiration of the Consideration Period or the date that is one day after the resolution of all claims regarding wages;
☐ But for the Employee’s execution of this Agreement, the Employee would not otherwise be entitled to the payments described in paragraph 2; and
☐ if any part of this Agreement is found to be illegal or invalid, the rest of the Agreement will be enforceable.
10. As a further consideration and inducement for this Agreement, the Employee hereby waives any and all rights under Section 1542 of the California Civil Code or any similar state, local, or federal law, statute, rule, order or regulation the Employee may have with respect to the Company. Section 1542 provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
The Employee expressly agrees that this Release shall extend and apply to all unknown, unsuspected and unanticipated injuries and damages as well as to those that are now disclosed.
11. After the Employee signs this agreement, the Employee will have 7 days to revoke it. If the Employee wants to revoke it, the Employee should deliver a written revocation to __________. If the Employee does not revoke it, the Employee will receive the payment described in Paragraph 2.
COMPANY
TSS, INC.
| By: | Date: | ||||
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| EMPLOYEE | |||||
| Date: | |||||
| Todd Marrott | |||||
ATTACHMENT A
CONSIDERATION PERIOD
I, Todd Marrott, understand that I have the right to take at least 21 days to consider whether to sign this Separation From Employment and Release Agreement, which I received on [TERMINATION DATE]. If I elect to sign this Agreement before 21 days have passed, I understand I am to sign and date below this paragraph to confirm that I knowingly and voluntarily agree to waive the 21-day consideration period.
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Employee Signature |
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Exhibit 10.35
AWARD AGREEMENT
This Award Agreement (this “Agreement”) is made as of November 2, 2022 (“Grant Date”), between TSS, Inc. (the “Company”) and Todd Marrott (the “Executive”). The Board of Directors of the Company has authorized the grant to the Executive of (a) restricted shares (the “Restricted Stock”) of the Company’s common stock (“Common Stock”) and (b) an option (the “Option”) to purchase shares of Common Stock, subject to the terms and provisions of this Agreement. For the avoidance of doubt, neither the Restricted Stock nor the Option is being granted under the Company’s 2015 Omnibus Incentive Compensation Plan. The Company and the Executive have entered into that certain Executive Employment Agreement effective as of the date hereof (the “Employment Agreement”). Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings set forth in the Employment Agreement.
The Company and the Executive agree as follows:
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The Company grants to the Executive, subject to the terms and conditions of this Agreement, 100,000 shares of Restricted Stock. The Executive may exercise full voting rights with respect to the Restricted Stock. The Restricted Stock shall be forfeited automatically on the Termination Date. Unless forfeited in accordance with the immediately preceding sentence, the following shares of Restricted Stock shall become fully vested and no longer subject to forfeiture in accordance with the following: |
(a) all of the shares of Restricted Stock shall become fully vested upon the occurrence of a Change in Control of the Company,
(b) 50,000 shares of Restricted Stock shall become fully vested on November 2, 2023, and
(e) 50,000 shares of Restricted Stock shall become fully vested on November 2, 2024.
The Company shall retain any certificates representing the Restricted Stock until the Restricted Stock becomes fully vested and no longer subject to forfeiture.
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The Company grants to the Executive, subject to the terms and conditions of this Agreement, an Option to purchase 200,000 shares of Common Stock (“Option Shares”) in installments as set forth in the following sentence at an exercise price per share of $0.60 (the “Exercise Price”), which is equal to the volume weighted average price per share of the Common Stock reported daily on the OTCQB marketplace during the 30 calendar days immediately preceding the Grant Date. The Option shall become exercisable and may be exercised in installments in accordance with the following schedule: (a) with respect to 66,666 Option Shares, on November 2, 2023; (b) with respect to 66,667 Option Shares, on November 2, 2024; and (c) with respect to 66,667 Option Shares, on November 2, 2024. Notwithstanding the foregoing, the Option shall become immediately exercisable upon the occurrence of a Change in Control of the Company. The Option may not be exercised after November 2, 2032. |
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Except as otherwise set forth in this Agreement, the Option shall terminate effective the close of business on the Termination Date, except (a) to the extent previously exercised, (b) as provided in paragraph 5 of this Agreement, and (c) in the case termination of employment by the Company other than for Cause, for a period of 60 days thereafter the Executive shall be entitled to exercise that portion of the Option that was exercisable at the close of business on the Termination Date, provided that in no event may any portion of the Option be exercised after November 2, 2032. |
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The Option is nontransferable otherwise than by will or the laws of descent and distribution, and, during the lifetime of the Executive, the Option may be exercised only by the Executive or, during the period the Executive is under a legal disability, by the Executive’s guardian or legal representative. Except as provided above, neither the Restricted Stock nor the Option may be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. |
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If the Executive dies without the Option having been exercised in full, the executor or administrator of the Executive’s estate or the person who inherits the right to exercise the Option by bequest or inheritance shall have the right within three years of the Executive’s death to purchase the number of Option Shares the Executive was entitled to purchase at the date of death, after which the Option will lapse, provided that in no event may the Option be exercised after November 2, 2032. |
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The Option shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Option Shares with respect to which the Option is to be exercised, accompanied by full payment for the Option Shares. The Exercise Price shall be payable to the Company in full either: (a) in cash or its equivalent, (b) by tendering previously acquired shares of Common Stock having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price (provided that the shares that are tendered must have been held by the Executive for at least six (6) months prior to their tender to satisfy the Exercise Price), (c) by withholding shares of Common Stock issuable pursuant to the exercise of the Option having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price, or (d) such other methods as the Company shall authorize. The Company may permit the exercise of the Option upon the receipt from a third party of payment (or a commitment to make payment) in full in cash for the Exercise Price prior to the issuance of the Option Shares in the manner and subject to the procedures as may be established by the Company. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Executive, in the Executive’s name, certificates in an appropriate amount based upon the number of Option Shares purchased under the Option. For purposes of this Agreement, “Fair Market Value” means the fair market value of a share of Common Stock as determined in good faith by the Company’s Board of Directors. |
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The Option may be exercised non-sequentially in respect of any other option to acquire Common Stock granted to the Executive, whether in the Executive’s possession or hereafter acquired. |
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At the time the Restricted Stock vests or the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Executive hereby authorizes withholding from payroll or any other payment of any kind due the Executive and otherwise agrees to make adequate provision for foreign, federal, state and local taxes required by law to be withheld, if any, which arise in connection with the Restricted Stock or the Option. The Company may require the Executive to make a cash payment to cover any withholding tax obligation as a condition of issuance of share certificates representing Option Shares or upon the vesting of Restricted Stock. |
The Company may permit the Executive to satisfy, in whole or in part, any withholding tax obligation that may arise in connection with the vesting of Restricted Stock or the exercise of the Option either by electing to have the Company withhold from the shares of Common Stock to be issued upon vesting or exercise, as the case may be, that number of shares of Common Stock, or by electing to deliver to the Company already-owned shares of Common Stock, in either case having a Fair Market Value equal to the amount necessary to satisfy the statutory minimum withholding amount due. If the Executive elects to satisfy the tax withholding obligation by having the Company withhold shares of Common Stock upon the vesting of the Restricted Stock or the exercise of the Option, the number of shares of Common Stock to be withheld shall be based on the minimum estimated federal, state and local taxes payable by the Exercise as a result of the vesting of the Restricted Stock or the exercise of the Option.
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The Executive acknowledges and agrees that any sales of shares of Common Stock shall be made in accordance with the requirements of the Securities Act of 1933, as amended. The Company intends to file a registration statement with the Securities and Exchange Commission with respect to the Common Stock to be issued hereunder. The Company intends to maintain this registration statement but has no obligation to do so. If the Company fails to file such registration statement or the registration statement ceases to be effective for any reason or there is a restriction under foreign law, the Executive will not be able to transfer or sell any of the shares of Common Stock issued to the Executive under this Agreement unless exemptions from registration or filings under applicable securities laws are available. The Company shall not be obligated to either issue the Common Stock or permit the resale of any shares of Common Stock if such issuance or resale would violate any applicable securities law, rule or regulation. |
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Nothing in this Agreement shall interfere with or limit in any way the right of the Company to terminate the Executive’s employment at any time, nor confer upon the Executive any right to continue in the employ of the Company. |
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No provision of this Agreement may be amended unless such amendment is in writing and signed by the Executive and the Company. |
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All obligations of the Company under this Agreement shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. |
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To the extent not preempted by federal law, this Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to the conflict of laws principles thereof. |
The undersigned parties have executed this Agreement as of the day and year first above written.
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TSS, INC. |
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By: |
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Peter H. Woodward |
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Chairman of Board of Directors |
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EXECUTIVE |
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| Todd Marrott | |||
EXHIBIT 21.1
LIST OF SUBSIDIARIES AND THEIR COUNTRY OR STATE OF INCOPORATION/ORGANIZATION
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Name of Subsidiary |
State/Country of Incorporation/Organization |
Percentage of Voting Securities Owned by Immediate Parent |
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VTC, LLC d/b/a Total Site Solutions |
Maryland |
100% |
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Vortech, LLC |
Maryland |
100% |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File No. 333-142906, File No. 333-167688, File No. 333-183436, File No. 333-184956, File No. 333-207114, and File No. 333-264212) of TSS, Inc. of our report dated March 28, 2024, relating to the consolidated financial statements and financial statement schedules, which appear in this Form 10-K.
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/s/ Weaver and Tidwell L.L.P. |
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Austin, Texas |
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March 28, 2024 |
Exhibit 31.1
Certification of Chief Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Darryll Dewan, certify that:
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I have reviewed this Annual Report on Form 10-K of TSS, Inc.; |
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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; |
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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; |
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The registrant’s other certifying officer(s) 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: |
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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; |
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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; |
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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 |
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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 |
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The registrant’s other certifying officer(s) 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 persons performing the equivalent functions): |
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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 |
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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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March 28, 2024 |
/s/ Darryll Dewan |
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Darryll Dewan |
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Chief Executive Officer |
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TSS, Inc. |
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John K. Penver, certify that:
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I have reviewed this Annual Report on Form 10-K of TSS, Inc.; |
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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; |
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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; |
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The registrant’s other certifying officer(s) 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: |
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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; |
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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; |
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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 |
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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 |
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The registrant’s other certifying officer(s) 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 persons performing the equivalent functions): |
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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 |
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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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/s/ John K. Penver |
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Date: March 28, 2024 |
John K. Penver |
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Chief Financial Officer |
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TSS, Inc. |
Exhibit 32.1
STATEMENT OF CHIEF EXECUTIVE OFFICER
OF TSS, INC. PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of TSS, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Darryl Dewan, Chief Executive Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Darryll Dewan |
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Darryll Dewan |
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President and Chief Executive Officer |
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TSS, Inc. |
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March 28, 2024 |
Exhibit 32.2
STATEMENT OF CHIEF FINANCIAL OFFICER
OF TSS, INC. PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of TSS, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, John K. Penver, Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ John K. Penver |
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John K. Penver |
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Chief Financial Officer |
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TSS, Inc. |
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March 28, 2024 |