UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the quarterly period ended June 30, 2020

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-33627

 


 

TSS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

20-2027651

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

110 E. Old Settlers Blvd

Round Rock, Texas

78664

(Address of principal executive offices)

(Zip Code)

 

(512) 310-1000

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act : None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒   No  ☐

 

Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☐ 

Smaller reporting company  ☒

 

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Number of shares of common stock outstanding as of August 14, 2020              17,848,114

 

 

 

TSS, INC.

 

QUARTERLY REPORT ON FORM 10Q

 

For the Quarterly Period Ended June 30, 2020

 

“SAFE HARBOR” STATEMENT

ii

PART I–FINANCIAL INFORMATION

1

Item 1.    Consolidated Financial Statements

1

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.    Controls and Procedures

20

PART II–OTHER INFORMATION

21

Item 1.    Legal Proceedings

21

Item 1A. Risk Factors

21

Item 6.    Exhibits

21

 

 

 

“SAFE HARBOR” STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward- looking statements made in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as those made in other filings with the SEC.

 

Forward looking statements can be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee” or other similar words. Such forward looking statements are based on management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

 

As used herein, except as otherwise indicated by the context, the terms “TSS”, “Company”, “we”, “our” and “us” are used to refer to TSS, Inc. and its subsidiaries.

 

ii

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

TSS, Inc.

Consolidated Balance Sheets

(in thousands except par values)

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 
   

(unaudited)

         

Current Assets:

               

Cash and cash equivalents

  $ 7,134     $ 8,678  

Contract and other receivables, net

    2,819       3,865  

Costs and estimated earnings in excess of billings on uncompleted contracts

    366       181  

Inventories, net

    950       1,353  

Prepaid expenses and other current assets

    306       108  

Total current assets

    11,575       14,185  

Property and equipment, net

    862       705  

Lease right-of-use asset

    1,188       1,481  

Goodwill

    780       780  

Intangible assets, net

    262       307  

Other assets

    109       109  

Total assets

  $ 14,776     $ 17,567  
                 

Current Liabilities:

               

Bank note payable

  $ 424     $ -  

Accounts payable and accrued expenses

    5,422       8,851  

Deferred revenues

    3,452       2,104  

Current portion of lease liabilities

    695       645  

Total current liabilities

    9,993       11,600  

Long-term borrowings

    2,130       2,028  

Non-current portion of lease liabilities

    595       956  
Non-current portion of bank note payable     468       -  

Deferred revenues – non-current portion

    97       114  

Total liabilities

    13,283       14,698  
                 

Commitments and Contingencies

    -       -  
                 

Stockholders’ Equity:

               

Preferred stock, $.0001 par value; 1,000 shares authorized at June 30, 2020 and December 31, 2019; none issued

    -       -  

Common stock, $.0001 par value; 49,000 shares authorized at June 30, 2020 and December 31, 2019; 18,940 and 18,524 issued; 17,848 and 17,562 outstanding at June 30, 2020 and December 31, 2019, respectively

    2       2  

Additional paid-in capital

    69,865       69,661  

Treasury stock 1,092 and 962 shares at cost at June 30, 2020 and December 31, 2019

    (1,870 )     (1,700 )

Accumulated deficit

    (66,504

)

    (65,094

)

Total stockholders' equity

    1,493       2,869  

Total liabilities and stockholders’ equity

  $ 14,776     $ 17,567  

 

See accompanying notes to the consolidated financial statements.

 

 

1

 

 

TSS, Inc.

Consolidated Statements of Operations

(in thousands, except per-share amounts; unaudited)

 

   

Three Months Ended June 30

   

Six Months Ended June 30

 
   

2020

   

2019

   

2020

   

2019

 

Results of Operations:

                               

Revenue

  $ 6,454     $ 3,539     $ 17,051     $ 8,199  

Cost of revenue

    5,687       2,087       14,683       5,111  

Gross profit

    767       1,452       2,368       3,088  

Selling, general and administrative expenses

    1,584       1,371       3,343       2,876  

Depreciation and amortization

    132       79       251       160  

Total operating costs

    1,716       1,450       3,594       3,036  

Income (loss) from operations

    (949

)

    2       (1,226

)

    52  

Other income (expense):

                               

Interest expense, net

    (84

)

    (87

)

    (166

)

    (160

)

Income (loss) from operations before income taxes

    (1,033

)

    (85

)

    (1,392

)

    (108

)

Income tax expense

    9       9       18       17  

Net income (loss)

  $ (1,042

)

  $ (94

)

  $ (1,410

)

  $ (125

)

                                 

Basic and diluted income (loss) per common share

  $ (0.06

)

  $ (0.01

)

  $ (0.08

)

  $ (0.01

)

 

See accompanying notes to the consolidated financial statements. 

 

2

 

 

TSS, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share amounts, unaudited)

 

                   

Additional

                           

Total

 
   

Common Stock

   

Paid-in

   

Treasury Stock

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Equity

 

Balance January 1, 2019

    17,520     $ 2     $ 69,241       777     $ (1,542

)

  $ (65,220

)

  $ 2,481  

Restricted stock vested

    390       -       -       -       -       -       -  

Stock options exercised

    310       -       31       -       -       -       31  

Treasury shares repurchased

    -       -       -       159       (137

)

            (137

)

Stock-based compensation

    -       -       72       -       -       -       72  

Net loss

    -       -       -       -       -       (31

)

    (31

)

Balance at March 31, 2019

    18,220     $ 2     $ 69,344       936     $ (1,679

)

  $ (65,251

)

  $ 2,416  

Treasury shares repurchased

    -       -       -       20       (16

)

    -       (16

)

Stock options exercised

    230       -       23       -       -       -       23  

Stock-based compensation

    -       -       87       -       -       -       87  

Net loss

    -               -       -       -       (94

)

    (94

)

Balance at June 30, 2019

    18,450     $ 2     $ 69,454       956     $ (1,695 )   $ (65,345

)

  $ 2,416  

 

                   

Additional

                           

Total

 
   

Common Stock

   

Paid-in

   

Treasury Stock

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Deficit

   

Equity

 

Balance January 1, 2020

    18,524     $ 2     $ 69,661       962     $ (1,700

)

  $ (65,094

)

  $ 2,869  

Restricted stock vested

    392       -       -       -       -       -       -  

Treasury shares repurchased

    -       -       -       130       (170 )     -       (170

)

Stock options exercised

    24       -       2       -       -       -       2  

Stock-based compensation

    -       -       109       -       -       -       109  

Net loss

    -       -       -       -       -       (368 )     (368

)

Balance at March 31, 2020

    18,940     $ 2     $ 69,772       1,092     $ (1,870

)

  $ (65,462

)

  $ 2,442  

Stock-based compensation

    -       -       93       -       -       -       93  

Net loss

    -       -       -       -       -       (1,042

)

    (1,042

)

Balance at June 30, 2020

    18,940     $ 2     $ 69,865       1,092     $ (1,870

)

  $ (66,504

)

  $ 1,493  

 

See accompanying notes to the consolidated financial statements.  

 

3

 

 

TSS, Inc.

Consolidated Statements of Cash Flows

(in thousands; unaudited)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Cash Flows from Operating Activities:

               

Net loss

  $ (1,410

)

  $ (125

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    251       160  

Non-cash interest

    58       53  

Amortization of debt discount

    46       37  

Stock-based compensation

    202       159  

Changes in operating assets and liabilities:

               

Contract and other receivables

    1,046       37  

Costs and estimated earnings in excess of billings on uncompleted contracts

    (185

)

    -  

Inventories, net

    403       28  

Prepaid expenses and other current assets

    (198

)

    (71

)

Right-of-use assets

    293       257  

Accounts payable and accrued expenses

    (3,429

)

    (698

)

Deferred revenues

    1,331       561  

Operating lease liabilities

    (311

)

    (243

)

Net cash provided by (used in) operating activities

    (1,903

)

    155  

Cash Flows from Investing Activities:

               

Capital expenditures

    (363

)

    (164

)

Net cash used in investing activities

    (363

)

    (164

)

Cash Flows from Financing Activities:

               

Proceeds from issuance of equity

    2       54  

Proceeds from bank note payable

    890       -  

Repurchase of stock

    (170

)

    (153

)

Net cash proved by (used in) financing activities

    722       (99

)

Net decrease in cash and cash equivalents

    (1,544

)

    (108

)

Cash and cash equivalents at beginning of period

    8,678       6,178  

Cash and cash equivalents at end of period

  $ 7,134     $ 6,070  

Supplemental disclosure of cash flow information:

               

Cash paid for interest

  $ 90     $ 126  

Cash paid for taxes

  $ 45     $ 57  

 

See accompanying notes to the consolidated financial statements.

 

4

 

 

TSS, Inc.

Notes to Consolidated Statements

(unaudited)

 

Note 1 – Significant Accounting Policies

  

Description of Business

 

TSS, Inc. (‘‘TSS’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’) provides a comprehensive suite of services for the planning, design, deployment, maintenance, refresh and take-back of end-user and enterprise systems, including the mission-critical facilities they are housed in. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT reseller services. Our corporate offices and our integration facility are located in Round Rock, Texas.

 

The accompanying consolidated balance sheet as of December 31, 2019, which has been derived from audited consolidated financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the SEC for interim reporting, and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations, changes in stockholders’ equity and cash flows. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Revenue Recognition

 

We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative standalone selling prices.

 

Maintenance Services

 

We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. Our contract terms are typically one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services on a ratable basis over the contract term. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment, however our history of non-payments and bad debt expense has been insignificant.

 

Integration Services

 

We generate integration services revenues from fees that provide our customers with customized system and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods. We typically extend credit terms to our integration customers based on their credit worthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-60 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ credit worthiness. As of June 30, 2020, and December 31, 2019, our allowance for doubtful accounts was $8,000.

 

5

 

Equipment Sales

 

We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods. Typically, we do not receive advance payments for equipment sales; however, if we do, we record the advance payment as deferred revenues. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment sales are typically due within 30-45 days of invoicing.

 

Deployment and Other Services

 

We generate revenues from fees we charge our customers for other services, including repairs or other services not covered under maintenance contracts, installation and servicing of equipment, including modular data centers that we sold, and other fixed-price services, including repair, design and project management services. In some cases, we arrange for a third party to perform warranty and servicing of equipment, and in these instances, we recognize revenue as the amount of any fees or commissions that we expect to be entitled to receive. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional.

 

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 reseller 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 resold directly to the original equipment manufacturer (OEM) and other customers, and in these instances, we act as an agent in the transaction and recognize revenue as the amount of any fee or commissions that we expect to be entitled to receive. Accounts receivable from our reseller activities are typically due within 30-60 days of invoicing.

 

Judgments

 

We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.

 

Sales Taxes

 

Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.

 

Shipping and Handling Costs

 

Costs for shipping and handling activities, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of revenues and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has transferred to the customer.

 

6

 

The following table shows our revenues disaggregated by reportable segment and by product or service type (in ’000’s, unaudited):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

FACILITIES:

                               

Maintenance revenues

  $ 948     $ 1,096     $ 1,940     $ 2,152  

Equipment sales

    75       131       212       228  

Deployment and other services

    535       814       1,505       2,551  

Total Facilities revenues

  $ 1,558     $ 2,041     $ 3,657     $ 4,931  
                                 

SYSTEMS INTEGRATION:

                               

Integration services

  $ 1,879     $ 1,498     $ 3,604     $ 3,268  

Reseller services

    3,017       -     $ 9,790       -  

Total Systems Integration revenues

  $ 4,896     $ 1,498     $ 13,394     $ 3,268  

TOTAL REVENUES

  $ 6,454     $ 3,539     $ 17,051     $ 8,199  

 

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 June 30, 2020, deferred revenue of $3,452,000 includes $1,173,000 of our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and $2,279,000 relating to reseller and integration services where we have yet to complete our services for our customers. The remaining $97,000 of deferred revenue is our remaining performance obligations for maintenance services, which is expected to be recognized between one and three years.

 

Concentration of Credit Risk

 

We are currently economically dependent upon our relationship with a large US-based IT OEM. If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it would significantly reduce our revenue.

 

The following customer accounted for a significant percentage of our revenues for the periods shown (unaudited):

 

   

Three Months Ended June 30,

     

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

US-based IT OEM

    97 %     90 %     96 %     91 %

 

No other customers represented more than 10% of our revenues for any periods presented. Our US-based IT OEM customer represented 72% and 96% of our trade accounts receivable at June 30, 2020 and December 31, 2019, respectively. Additionally, a US-based IT systems integrator represented 13% of our accounts receivable at June 30, 2020. No other customer represented more than 10% of our accounts receivable at June 30, 2020 or at December 31, 2019.

 

Recent Accounting Pronouncements

 

In February 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2017-04, Intangibles – Goodwill and Other (topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The amendments in this ASU simplify how all entities assess goodwill for impairment by removing the requirement to determine the fair value of individual assets and liabilities in order to calculate a reporting unit’s “implied” goodwill. Specifically, the amendments in ASU 2017-04 eliminates Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. 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 should not exceed the total amount of goodwill allocated to that reporting unit. If fair value exceeds the carrying value, no impairment should be recorded. An entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely than not that goodwill is impaired. ASU 2017-04 eliminates the requirement to perform a qualitative assessment for any reporting unit with zero or negative carrying amount. For any reporting units with a zero or negative carrying amount, ASU 2017-04 adds a requirement to disclose the amount of goodwill allocated to it and the reportable segment in which it is included. ASU 2017-04 was effective for the Company for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods . We adopted ASU 2017-04 effective on January 1, 2020 and adoption had no impact on our consolidated financial statements. We will perform future goodwill impairment tests according to ASU 2017-04.

 

In June 2016, FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets. Among the provisions of ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need only consider past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with the consolidated financial statements we issue for the year ending December 31, 2023, and the quarterly periods during that year. We are currently evaluating the adoption date and the impact of the adoption of this guidance on our consolidated financial statements and disclosures.

 

7

 

In August 2018, FASB issued Accounting Standards Update 2018-15, Intangibles-Goodwill and Other Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2015-18”). ASU 2018-15 aligns a company’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. ASU 2018-15 clarifies that a company should apply ASC 350-40 to determine which implementation costs should be capitalized in a cloud computing arrangement that is a service contract. ASU 2018-15 does not change the accounting for the service component of a cloud computing arrangement. ASU 2018-15 is effective for our fiscal 2020 year and interim periods beginning in 2020. We intend to apply the prospective transition approach to adopt this guidance as we implement cloud computing arrangements in 2020 and do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In December 2019, FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance also clarifies and amends existing guidance to improve consistent application. The standard will be effective for us in our first quarter of fiscal 2023, with early adoption permitted. We are currently evaluating the adoption date and the impact of the adoption of this guidance on our consolidated financial statements and disclosures.

 

 

Note 2 – Supplemental Balance Sheet Information

 

Receivables

 

Contract and other receivables consisted of the following (in ‘000’s):

 

   

June 30,

2020

   

 

December 31,

2019

 
      (unaudited)          

Contract and other receivables

  $ 2,827     $ 3,873  

Allowance for doubtful accounts

    (8 )     (8

)

Contracts and other receivables, net

  $ 2,819     $ 3,865  

 

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:

 

   

June 30,

2020

   

 

December 31,

2019

 
      (unaudited)          

Raw materials

  $ 154     $ 99  

Reseller inventories

    800       1,258  

Reserve

    (4

)

    (4

)

Inventories, net

  $ 950     $ 1,353  

 

Goodwill and Intangible Assets, Net

 

Goodwill and intangible assets, net consisted of the following (in ‘000’s): 

   

   

June 30, 2020

   

December 31, 2019

 
    (unaudited)                
   

Gross

           

Gross

         
   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

 
   

Amount

   

Amortization

   

Amount

   

Amortization

 

Intangible assets not subject to amortization:

                               

Goodwill

  $ 780       -     $ 780       -  

Intangible assets subject to amortization:

                               

Customer relationships

  $ 906     $ (644 )   $ 906     $ (599 )

Acquired software

  $ 234     $ (234 )   $ 234     $ (234 )

 

 

Goodwill attributable to reporting units (in ‘000’s):

 

   

June 30,

2020

   

 

December 31,

2019

 
      (unaudited)          

Facilities unit

  $ 643     $ 643  

Systems Integration unit

    137       137  

Total

  $ 780     $ 780  

 

At December 31, 2019, the date of our last annual test, both the facilities unit and the systems integration unit had negative carrying amounts on our records.

 

8

 

We recognized amortization expense related to intangibles of approximately $23,000 for each of the three-month periods ended June 30, 2020 and 2019, respectively. We recognized amortization expense related to intangibles of approximately $45,000 for each of the six-month periods ended June 30, 2020 and 2019, respectively.

 

We have elected to use December 31 as our annual date to test goodwill and intangibles for impairment. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period, we will evaluate its indefinite lived intangible assets for impairment. We performed a quantitative analysis of our goodwill and intangibles at December 31, 2019 as part of our annual testing for impairment and concluded that there was no impairment. We considered relevant matters, including macroeconomic conditions and the effects of COVID-19 on our operations, and there were no identified material triggering events or circumstances that occurred during the three and six-month periods ended June 30, 2020 or 2019 that would have required an interim impairment analysis of our goodwill and other long-lived intangible assets.

 

Property and Equipment

 

Property and equipment consisted of the following (in ’000’s):

  

    Estimated Useful

Lives (years)

  June 30,

2020

   

December 31,

2019

 
              (unaudited)          

Trade equipment

    5     $ 144     $ 105  

Leasehold improvements

   2 5     697       638  

Furniture and fixtures

    7       16       16  

Computer equipment and software

    3       2,067       1,802  
              2,924       2,561  

Less accumulated depreciation

            (2,062

)

    (1,856

)

Property and equipment, net

          $ 862     $ 705  

 

Depreciation of property and equipment and amortization of leasehold improvements and software totaled $109,000 and $57,000 for the three-month periods ended June 30, 2020 and 2019, respectively. Depreciation of property and equipment and amortization of leasehold improvements and software totaled $206,000 and $115,000 for the six-month periods ended June 30, 2020 and 2019, respectively.

 

Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following (in ’000’s):

 

   

June 30,

2020

   

December 31,

2019

 
    (unaudited)          

Accounts payable

  $ 4,455     $ 7,890  

Accrued expenses

    542       473  

Compensation, benefits & related taxes

    412       464  

Other accrued expenses

    13       24  

Total accounts payable and accrued expenses

  $ 5,422     $ 8,851  

 

 

Note 3 – Bank Note Payable

 

In April 2020, VTC, L.L.C. (the “Borrower”), a wholly-owned subsidiary of TSS, Inc., applied to Texas Capital Bank, N.A. under the Small Business Administration Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) for a loan of approximately $890,000 (the “PPP Loan”). On April 17, 2020 the PPP Loan was approved and the Borrower received the PPP Loan proceeds, which the Borrower used for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

 

The PPP Loan, which took the form of a promissory note issued by the Borrower, has a two-year term, matures on April 12, 2022, and bears interest at a rate of 1% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence on October 12, 2020. The Borrower did not provide any collateral or guarantees for the PPP Loan, nor did the Borrower pay any fees to obtain the PPP Loan. The promissory note provides for customary events of default, including, among others, failure to make a payment when due, cross-defaults under any loan documents with the lender, certain cross-defaults under agreements with third parties, events of bankruptcy or insolvency, certain change of control events, and material adverse changes in the Borrower’s financial condition. If an event of default occurs, the lender will have the right to accelerate indebtedness under the PPP Loan and/or pursue other remedies available to the lender pursuant to the terms of the promissory note.

 

9

 

The Borrower may apply to the lender for forgiveness of some or all of the PPP Loan, with the amount which may be forgiven equal to the sum of eligible payroll costs, mortgage interest, covered rent and covered utilities payments, in each case incurred by the Borrower during the eight-week period following the effective date of the promissory note, calculated in accordance with the terms of the CARES Act. Certain reductions in the Borrower’s payroll costs during the eight-week period may reduce the amount of the PPP Loan eligible for forgiveness. There is no guarantee, and the lender does not make any representation, that the Borrower will receive forgiveness for any fixed amount of any of the PPP Loan proceeds received by the Borrower.

 

   

June 30,

2020

   

December 31,

2019

 
    (unaudited)          

Notes Payable due April 2022

  $ 890     $ -  

Accrued interest

    2       -  
      892       -  

Current portion of promissory notes

    424       -  

Non-current portion of promissory notes

  $ 468     $ -  

 

 

Note 4 – Long-Term Borrowings

   

Long-term borrowings consisted of the following (in ’000’s): 

 

   

June 30,

2020

   

December 31,

2019

 
    (unaudited)          

Notes Payable due July 2022

  $ 1,995     $ 1,995  

Accrued interest – long term

    312       255  

Less unamortized discount and debt issuance costs

    (177

)

    (222

)

      2,130       2,028  

Current portion of long-term borrowing

    -       -  

Non-current portion of long-term borrowing

  $ 2,130     $ 2,028  

 

In February 2015, we entered into a multiple advance term loan agreement and related agreements with MHW SPV II, LLC (‘‘MHW’’), an entity affiliated with the Chairman of our Board of Directors, for a loan in the maximum amount of $2 million. We borrowed $945,000 under this loan agreement on February 3, 2015 and executed a promissory note to evidence this loan and the terms of repayment which requires interest-only payments until maturity.

 

In July 2017, we amended and restated the terms of this multiple advance term loan agreement whereby we increased the maximum principal amount of loans to $2.5 million for up to sixty days, and $2 million thereafter. The term of the loan was modified to be five years from the date of modification, thereby extending the term of the $945,000 loan to July 19, 2022. As part of this modification, the interest rate on the $945,000 loan remains at a fixed annual rate of 12%, however it was changed so that 6% is paid in cash monthly in arrears, and 6% is payable in kind, to be evidenced by additional promissory notes having an aggregate principal amount equal to the accrued but unpaid interest. We can prepay the loan at any time, subject to a prepayment fee of 1% if the repayment was made prior to July 19, 2020.

 

In conjunction with entering into the loan agreement, the Company and MHW also entered into a warrant granting MHW the right to purchase up to 1,115,827 shares of the Company’s common stock. As part of the July 2017 modification, we also modified the warrant to change the exercise price of the shares and to extend the term of the warrant to July 19, 2022. The warrant is now exercisable for a period of five years from July 19, 2017 at an exercise price of $0.10 for the first 390,539 shares, $0.20 for the next 390,539 shares and $0.30 for the final 334,749 shares. The exercise price and number of shares of common stock issuable on exercise of the warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. The fair value of the modified warrant was determined to be approximately $167,000 and the incremental value of the warrant compared to the original warrant was approximately $6,000. This amount was added to the remaining unamortized value of the original warrant such that approximately $93,000 will be amortized to interest expense using the straight-line method (which approximates the effective interest rate method) over the term of the loan. Approximately $5,000 was amortized during each of the three-month periods ended June 30, 2020 and 2019, respectively, for this warrant. Approximately $9,000 was amortized for this warrant during each of the six-month periods ended June 30, 2020 and 2019, respectively.

 

10

 

On July 19, 2017, we borrowed an additional $650,000 from MHW Partners, an entity affiliated with MHW. This loan ranks parri-passu with the $945,000 promissory notes held by MHW and is subject to the same loan agreement. Similar to the notes held by MHW, this note issued to MHW Partners bears interest at 12% per annum payable in cash monthly in arrears at a rate of 6% per annum and payable in kind at a fixed rate of 6% per annum and has a maturity date of July 19, 2022. We can prepay the note issued to MHW Partners at any time, subject to a prepayment fee of 1% if the repayment is made prior to July 19, 2020.

 

The obligations under the loan to MHW and MHW Partners are secured by substantially all of the Company’s assets pursuant to the terms of a security agreement. At the time we entered into the revolving line of credit described below, MHW and MHW Partners executed a subordination agreement to evidence their agreement that their security interest is subordinated to the security interest of Texas Capital Bank, N.A.

 

In conjunction with entering into the loan with MHW Partners, we entered into a warrant granting MHW Partners the right to purchase up to 767,500 shares of our common stock. The warrant is exercisable for a period of 5 years from July 19, 2017, at an exercise price of $0.10 for the first 268,625 shares, $0.20 for the next 268,625 shares and $0.30 for the final 230,250 shares. The exercise price and number of shares of common stock issuable upon exercise of this warrant will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transactions. The fair value of the warrant granted was approximately $115,000. Using the relative-fair value allocation method, the debt proceeds were allocated between the debt value and the fair value of the warrants, resulting in a recognition of a discount on the loan of approximately $98,000 and a corresponding increase to additional paid-in capital. This discount will be amortized to interest expense using the effective interest rate method over the term of the loan. Approximately $5,000 was amortized during each of the three-month periods ended June 30, 2020 and 2019, respectively. Approximately $10,000 was amortized during each of the six-month periods ended June 30, 2020 and 2019, respectively.

 

Peter H. Woodward, the Chairman of our Board of Directors, is a principal of MHW Capital Management LLC, which is the investment manager of MHW and MHW Partners. MHW Capital Management LLC is entitled to a performance related fee tied to any appreciation in the valuation of the common stock in excess of the applicable strike price under the warrant.

 

On October 6, 2017, we entered into an amendment to our multiple advance term loan agreement and the related security agreement with MHW and MHW Partners, to add new lenders to the loan and security agreements. Upon execution, Mr. Glen Ikeda and Mr. Andrew Berg became new lenders to the Company. In accordance with the terms of the Amendment, Mr. Ikeda then provided a loan in the amount of $300,000 and Mr. Berg provided a loan in the amount of $100,000 (collectively the “New Loans”).

 

The New Loans have a maturity date of July 19, 2022. The New Loans do not bear interest and we are permitted to make optional prepayments at any time without premium or penalty.

 

The New Loans include customary affirmative covenants for secured transactions of this type, including compliance with laws, maintenance of insurance, maintenance of assets, timely payments of taxes and notice of adverse events. The loan agreement and ancillary documents include customary negative covenants including limitations on liens on assets of the Company.

 

Concurrent with the New Loans, we entered into a warrant with Mr. Ikeda granting Mr. Ikeda the right to purchase up to 954,231 shares of our common stock. This warrant was exercisable until July 19, 2022, at an exercise price of $0.10 for the first 498,981 shares, $0.20 for the next 273,981 shares and $0.30 for the final 181,269 shares.  Mr. Ikeda exercised the warrant in December 2018.

 

Concurrent with the New Loans, we entered into a warrant with Mr. Berg granting Mr. Berg the right to purchase up to 318,077 shares of our common stock. This warrant was exercisable until July 19, 2022, at an exercise price of $0.10 for the first 166,327 shares, $0.20 for the next 91,327 shares and $0.30 for the final 60,423 shares.  Mr. Berg exercised the warrant in December 2018.

 

The fair value of the two warrants granted in connection with the New Loans was approximately $367,000. Using the relative fair-value allocation method, the debt proceeds were allocated between the debt value and the fair value of the warrants, resulting in a recognition of a discount on the New Loans of approximately $191,000, with a corresponding increase to additional paid-in capital. This discount will be amortized to interest expense over the term of the loan using the straight-line method (which approximates the effective interest rate method). Approximately $10,000 was amortized during each of the three-month periods ended June 30, 2020 and 2019, respectively, and approximately $20,000 was amortized during each of the six-month periods ended June 30, 2020 and 2019, respectively. 

 

11

 

 

Note 5 Revolving Line of Credit

 

In December 2018, we entered into a revolving line of credit (the “credit facility”) with Texas Capital Bank, National Association (“Lender”) pursuant to a Business Loan Agreement (Asset Based) (the “Loan Agreement”). The obligations under the credit facility are secured by substantially all of our assets. Our wholly-owned subsidiaries, Vortech LLC, and VTC, L.L.C., jointly and severally guarantee our obligations under the credit facility.

 

The maximum amount of the credit facility is $1,500,000. The credit facility is subject to a borrowing base of 80% of eligible accounts receivables, subject to customary exclusions and limitations. Borrowings under the credit facility will bear interest at LIBOR plus 3% (effective rate of 3.18% at June 30, 2020). Certain accounts receivables subject to a vendor payment program with a customer are excluded from the definition of eligible accounts receivables under the credit facility. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the credit facility, we will pay a 0.25% unused credit facility fee, payable quarterly in arrears. The credit facility matures on December 31, 2020.

 

The credit facility requires that we maintain a minimum liquidity of $500,000 at all times excluding availability under the loan. It also requires us to comply with certain financial covenants including a maximum Total Leverage Ratio of 3.00, a minimum Total Interest Coverage Ratio of 2.50 and a minimum Total Fixed Charge Coverage Ratio of 1.25. The credit facility also limits the amount of new indebtedness to $250,000 per fiscal year without Lender’s prior written approval. In June 2020, we modified the terms of the credit facility so that if we did not meet the Total Interest Coverage Ratio of 2.5, we could satisfy the requirement by meeting a 1.25x minimum Total Interest Coverage Ratio and maintaining unrestricted liquidity for the greater of (i) $2,000,000 or (ii) two times the outstanding balance on the credit facility.

 

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 assets of the Company. 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 were eligible to borrow at June 30, 2020 was approximately $140,000. There were no amounts outstanding under this credit facility at June 30, 2020. Due to our net losses we were not in compliance with the financial covenants at June 30, 2020, and therefore were not eligible to borrow against the facility.

 

 

Note 6 - 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 1 to 3 years. As of June 30, 2020, we have not entered into any lease arrangement classified as a finance lease.

 

We determine if an arrangement is a lease at inception. Operating leases are included in lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our consolidated balance sheet. We have elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. We also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, we did not need to reassess whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.

 

12

 

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:

 

   

Three Months Ended

June 30,

2020

   

 

Six Months Ended

June 30,

2020

 
    (unaudited)     (unaudited)  

Lease expense

               

Operating lease cost

  $ 202       399  

Variable lease cost

    -       -  

Sublease income

    (16 )     (32

)

Total operating lease cost

    186       367  
                 

Operating Lease – operating cash flows

    (160 )     (311

)

New right-of-use assets – operating leases

    -       -  

Weighted average remaining lease term – operating leases (months)

 

21

   

24

 

Weighted average discount rate – operating leases

    12.0 %     12.0 %

 

Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows (in ‘000’s):

 

   

Fiscal

Year

 

2020

  $ 404  

2021

    823  

2022

    209  

2023

    5  

Thereafter

    -  

Total minimum future lease payments

    1,441  

Less imputed interest

    (151

)

Total

  $ 1,290  

 

Reported as of June 30, 2020

       

Current portion of lease liability

  $ 695  

Non-current portion of lease liability

    595  
    $ 1,290  

 

13

 

 

Note 7 - Net Loss Per-Share

 

Basic and diluted loss per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purposes of determining diluted income (loss) per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

 

The following table presents a reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for net income (loss). In the table below, net income (loss) represents the numerator and shares represents the denominator (in thousands except per share amounts; unaudited).  

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Basic net loss per share:

                               

Numerator:

                               

Net loss

  $ (1,042 )   $ (94 )   $ (1,410 )   $ (125 )

Denominator:

                               

Weighted-average shares of common stock outstanding

    17,841       17,394       17,785       17,289  

Basic net income (loss) per share

  $ (0.06 )   $ (0.01 )   $ (0.08 )   $ (0.01 )
                                 

Diluted net loss per share:

                               

Numerator:

                               

Net loss

  $ (1,042 )   $ (94 )   $ (1,410 )   $ (125 )

Less interest expense on convertible debt

    -       -       -       -  
    $ (1,042 )   $ (94 )   $ (1,410 )   $ (125 )

Denominator:

                               

Weighted-average shares of common stock outstanding

    17,841       17,394       17,785       17,289  

Dilutive options and warrants outstanding

    -       -       -       -  

Effect of conversion of convertible notes

    -       -       -       -  

Number of shares used in diluted per-share computation

    17,841       17,394       17,785       17,289  
                                 

Diluted net loss per share

  $ (0.06 )   $ (0.01 )   $ (0.08 )   $ (0.01 )

 

For the three-month periods ended June 30, 2020 and 2019, potentially dilutive shares of 4,750,000 and 3,613,000 were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive.  

 

For the six-month periods ended June 30, 2020 and 2019, potentially dilutive shares of 4,745,000 and 3,537,000 were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive.

 

 

Note 8 – Related Party Transactions

 

We have $945,000 principal outstanding at June 30, 2020 in promissory notes payable to MHW, net of remaining discount of $43,000. Per the terms of the notes, we paid interest of approximately $33,000 and $32,000 during the three-month periods ended June 30, 2020 and 2019, respectively, and we paid interest of approximately $66,000 and $62,000 during the six-month periods ended June 30, 2020 and 2019, respectively. We have $650,000 principal outstanding at June 30, 2020 in promissory notes payable to MHW Partners, net of remaining discount of $44,000. Per the terms of the notes, we paid interest of $23,000 and $22,000 during the three-month periods ended June 30, 2020 and 2019, respectively, and we paid interest of $46,000 and $43,000 during the six-month periods ended June 30, 2020 and 2019, respectively. Peter H. Woodward, the Chairman of our Board of Directors, is a principal of MHW Capital Management, LLC, which is the investment manager of MHW 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.

 

14

 

 

 Note 9 - Segment Reporting

 

Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by our chief operating decision-maker in assessing performance and allocating resources. Our activities are organized into two major segments: facilities and systems integration. Our facilities unit is involved in the design, project management and maintenance of data center and mission-critical business operations. Our systems integration unit integrates IT equipment for OEM vendors and customers to be used inside data center environments, including modular data centers, and also includes our reseller services where we procure equipment to be used in our integration activities. All revenues are derived from the U.S. market. Segment operating results reflect earnings before stock-based compensation, acquisition related expenses, other expenses, net, and provision for income taxes.

 

Revenue and operating results by reportable segment reconciled to reportable net income (loss) for the three and six-month periods ended June 30, 2020 and 2019 and other segment-related information is as follows (in ‘000’s, unaudited):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Facilities

  $ 1,558     $ 2,041     $ 3,657     $ 4,931  

Systems integration services

    4,896       1,498       13,396       3,268  

Total revenues

  $ 6,454     $ 3,539     $ 17,051     $ 8,199  
                                 

Income (loss) from operations:

                               

Facilities

  $ 110     $ 515     $ 129     $ 1,025  

Systems integration services

    (1,059 )     (513 )     (1,355 )     (973 )

Total income (loss) from operations

  $ (949 )   $ 2     $ (1,226 )   $ 52  
                                 

Depreciation expense:

                               

Facilities

  $ 57     $ 12     $ 108     $ 44  

Systems integration services

    50       45       95       71  

Consolidated depreciation expense

  $ 107     $ 57     $ 203     $ 115  
                                 

Interest expense:

                               

Facilities

  $ 50     $ 64     $ 103     $ 124  

Systems integration services

    44       51       91       100  

Consolidated interest expense

  $ 94     $ 115     $ 194     $ 224  
                                 
   

June 30, 2020

   

Dec. 31, 2019

                 

Total Assets:

                               

Facilities

  $ 1,034     $ 939                  

Systems integration services

    4,914       6,120                  

Other consolidated activities

    8,828       10,508                  

Total

  $ 14,776     $ 17,567                  

 

Other consolidated activities include assets not specifically attributable to each business segment including cash and cash equivalents, prepaid expenses and other assets that are managed at a corporate level.

 

15

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2019 included in our 2019 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2019 Annual Report on Form 10-K for a discussion of items that may affect our future results. 

 

Overview

 

TSS, Inc. (‘‘TSS’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’) provides comprehensive services for the planning, design, deployment, maintenance, and refurbishment of end-user and enterprise systems, including the mission-critical facilities they are housed in. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services include technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT reseller services. Our headquarters and our integration facility are in Round Rock, Texas.

 

Our business is concentrated on the data center infrastructure and services market. This market continues to be highly competitive as commerce moves to cloud-based solutions and as data storage requirements continue to escalate for many industries. These underlying macroeconomic trends are driving demand for more information technology equipment and more efficient data center design and operation, resulting in continued growth in this market. We compete against many larger competitors who have greater resources than we do, which may affect our competitiveness in the market. We rely on several large customers to win contracts and to provide business to us under ‘‘Master Service Agreements’’, and the loss of such customers would have a material negative effect on our results.

 

During 2019 we began providing reseller services to our clients. Previously almost all inventory used in our systems integration business was consigned to us by our original equipment manufacturer (OEM) and end-user customers. We now offer our customers the ability to procure third-party hardware, software and services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are resold directly to the OEM and other customers. The reseller services allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher profits on integration projects by broadening our revenue and customer base.

 

In March 2020, the coronavirus disease 2019 ("COVID-19") was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government. The pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

 

The onset of the COVID-19 pandemic has had an immediate and ongoing impact on our operations in both our facilities segment and our systems integration segment. Travel restrictions and other customer-actions that have restricted physical access to customer sites have negatively impacted our facilities segment because we have been unable to access customer locations to provide our services. The delay of customer projects also negatively affected our facilities segment. Our facilities revenues have decreased by 26% in the first half of 2020 compared to the previous year because of these restrictions. Our systems integration business has not seen a revenue decline because of the pandemic but has been negatively impacted due to logistical and supply-chain issues that have affected component supply to us. This has had a material impact on our ability to complete several reseller transactions during the first half of 2020 because we could not complete the procurement of inventory for customers. Safety and other measures that we also had to implement in our systems integration facility because of the pandemic have materially increased the cost of operating and providing our services during the second quarter of 2020 and this has negatively impacted our second quarter financial performance.

 

16

 

At this point we do not know how long this pandemic and its associated impact on our business will continue, or if it will worsen or improve. To the extent these travel restrictions continue, the pandemic worsens, or we have further supply chain challenges, our business will continue to be negatively impacted.

 

During the second quarter of 2020 we were able to participate in the Payroll Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) and qualified for a loan of approximately $890,000. The proceeds were received in April 2020 and were used for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. We intend to apply for forgiveness of this loan amount during the third quarter of 2020 as contemplated by the CARES Act. There is no guarantee however that we will receive forgiveness for all or any of the loan proceeds.

 

RESULTS OF OPERATIONS

 

Revenue

 

Revenue consists of fees earned from the planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenue from providing system configuration and integration services, including reseller services, to IT equipment vendors. Currently we derive all our revenue from the U.S. market.

 

We contract with our customers under five primary contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price arrangements, which generate higher profit margins generally, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers' equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter into comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.

 

Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability.

 

We have been concentrating our sales efforts towards maintenance and integration services where we have traditionally earned higher margins. Historically our design and project-management services were tied to a few, high-value contracts for the construction of new data centers at any point in time. In addition to contributing to large quarterly fluctuations in revenue depending upon project timing, these projects required higher levels of working capital and generated lower margins than our maintenance and integration services. We re-focused our design and project management services towards smaller scaled jobs typically connected with addition/move/retrofit activities rather than new construction, to obtain better margins. We have also focused on providing maintenance services for modular data center applications as this market continues to expand. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business.

 

Revenues for the three-month period ended June 30, 2020 increased by $2.9 million or 82% compared to the second quarter of 2019. This growth was driven by $3 million of reseller services in 2020 that drove a 227% increase in our systems integration segment compared to the prior year. We began providing reseller services in the third quarter of 2019 where we procure third-party hardware, software and services on our customer’s behalf that are then used in our integration services as we integrate those components to deliver a completed system to our customer. Traditionally, the majority of our integration services have been performed using customer-owned inventory.

 

Revenues in our facilities segment decreased by $0.5 million or 24% compared to the second quarter of 2019 due to lower levels of modular data center deployments. This was caused by customer deferrals of projects and by restrictions on travel and site access primarily as a result of the COVID-19 pandemic that prevented us from accessing customer locations to provide services during the period.

 

Revenues of $17.1 million for the six-month period ended June 30, 2020 increased by $8.9 million or 108% compared to the $8.2 million we had in the first half of 2019. This increase was primarily attributable to the $9.8 million of reseller services in 2020 that drove a 310% increase in our systems integration segment compared to 2019 when we had no such services. Primarily due to site access restrictions caused by the COVID-19 pandemic, we have seen a $1.3 million, or 26% decrease in our facilities segment revenues in the first six months of 2020 compared to the comparable period in 2019.

 

17

 

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 88% for the three-month period ended June 30, 2020 compared to 59% for the same period in 2019. This increase from the second quarter of 2019 reflects the introduction of our reseller business where we earn much lower margins on product purchase/resell services than we do with our traditional integration and maintenance services. As the percentage of our total revenue derived from reseller services increases, we would anticipate that cost of revenue as a percentage of sales will increase. Absent the reseller business, the profit margin from our integration and maintenance services decreased by 15% in the second quarter of 2020 compared to the same quarter of 2019 due to higher operating costs of our integration facility due to the COVID-19 pandemic. For the six-month period ended June 30, 2020 the cost of revenue as a percentage of revenue was 86% compared to 62% for the same period in 2019, reflecting the impact of our reseller services on our cost of revenue.     

 

As our reseller business is relatively new, the level of expected revenue from our reseller services could fluctuate significantly on a quarterly basis. As a result, our cost of revenue as a percentage of total revenue could also fluctuate significantly. Cost of revenue for reseller services is higher than cost of revenue for our integration and maintenance services.

 

Since we earn higher profits when using our own labor services, we expect gross margins to improve when our labor services mix increases relative to the use of subcontracted labor or third-party labor. Our direct labor costs are relatively fixed in the short-term, and the utilization of direct labor is critical to maximizing our profitability. As we continue to bid and win contracts that require specialized skills that we do not possess, we would expect to have more third-party subcontracted labor to help us fulfill those contracts. In addition, we can face hiring challenges in internally staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead improves our overall profitability by increasing income, broadening our revenue base and generating a favorable return on invested capital. As we increase the level of IT reseller services in the future, we anticipate that our overall gross margin will decrease as the normal margins on reseller activities are lower than the margins from our traditional facilities and systems integration services.

 

A large portion of our revenue is derived from fixed price contracts. Under these contracts, we set the price of our services and assume the risk that the costs associated with our performance may be greater than we anticipated. Our profitability is therefore dependent upon our ability to estimate accurately the costs associated with our services. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid on the contract, and higher than expected costs of materials and labor. Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity.

 

Gross Profit

 

Our gross profit margin for the three-month period ended June 30, 2020 was 12% compared to a gross profit margin of 41% in the second quarter of 2019. This decrease in margin compared to the second quarter of 2019 was primarily attributable to the introduction of our reseller business where we earn much lower margins on product purchase/resell services than what we earn from our core integration and maintenance activities. The decrease in gross margin in the second quarter was attributable to the higher operating cost of our systems integration business because of changes made to deal with the COVID-19 pandemic. For the six-month period ended June 30, 2020 our gross profit margin was 14% compared to a gross profit margin of 38% for the same period of 2019. This decrease in margin was due to the introduction of reseller services in our 2020 results. Despite the impact of reseller revenues in 2020 that increased our revenues compared to 2019, over overall gross profit decreased by $720,000 in the six months ended June 30, 2020 compared to the same period of 2019, reflecting lower profitability in our facilities business, and higher operating costs and lower profitability in our systems integration business.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses primarily consists of compensation and related expenses, including variable sales compensation, for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs. For the three-month period ended June 30, 2020, our selling, general and administrative expenses increased by $213,000 or 16% compared to the second quarter of 2019. This increase was due primarily to higher compensation-related costs and for higher costs related to increasing our production capabilities, including the introduction of new systems. Our selling, general and administrative expenses decreased by $175,000 or 10% from the $1.8 million we had in the first quarter of 2020 due to lower professional fees as we incur professional fees associated with audit and public-company filing expenses in the first quarter of each calendar year. For the six-month period ended June 30, 2020, our selling, general and administrative expenses of $3.3 million were $467,00 or 16% higher than the same period of 2019, mainly due to higher levels of staffing and personnel costs.

 

18

 

Operating Income (Loss)

 

For the three-month period ended June 30, 2020, we recorded an operating loss of $949,000. This compares to an operating profit of $2,000 that we had in the second quarter of 2019 and an operating loss of $277,000 in the first quarter of 2020.

 

Net Loss

 

After net interest expense and income taxes we recorded a net loss of $1,042,000 or ($0.06) per share for the three-month period ended June 30, 2020. This compared to a net loss of $94,000 or $(0.01) per share for the second quarter of 2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity at June 30, 2020 are our cash and cash equivalents on hand, funds available under our bank credit facility, vendor trade-credit and projected cash flows from operating activities.

 

If we continue to meet the cash flow projections in our current business plan, we expect that we will have adequate capital resources necessary to continue operating our business for at least the next twelve months. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, there are potential risks, including that our revenues may not meet our projections, our costs may exceed our estimates, or our working capital needs may be greater than anticipated particularly as we increase our level of reseller services or due to the economic impacts of the COVID-19 pandemic. Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectation of cash usage in 2020 and beyond or significantly affect our level of liquidity, which may limit our opportunities to grow our business.

 

As at June 30, 2020 and December 31, 2019, we had cash and cash equivalents of $7.1 million and $8.7 million, respectively.

 

Significant Uses of Cash

 

Operating Activities

 

Cash used in operating activities for the six-month period ended June 30, 2020 was $1.9 million compared to cash provided by operating activities of $155,000 for the six-month period ended June 30, 2019. This change was largely attributable to the financial aspects of our reseller business which we did not have in the comparable period of 2019 and due to the operating losses we incurred in 2020. Due to the structure of our reseller arrangements, there was a large amount of vendor payables at December 31, 2019 for resale inventory purchased in late 2019. This resulted in a significant amount of vendor payments made in early 2020, which greatly contributed to the amount of cash used in operating activities. During the second quarter as we prepared for more reseller transactions we saw an increase in inventory, receivables and payables all tied to our reseller business. We have been able to structure our reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities. However due to timing it is possible to see fluctuations on a quarterly basis for reseller contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit to continue financing our reseller activities as we grow this business during 2020.

 

Investing Activities

 

Cash used in investing activities was $363,000 in the six-month period ended June 30, 2020 for the purchases of property and equipment as we expanded our production floor, and added new infrastructure and equipment to support new services. This compares to cash used in the first half of 2019 of $164,000 for purchases of property and equipment.

 

Financing Activities

 

Cash provided by financing activities was $722,000 for the six-month period ended June 30, 2020 compared to cash used in financing activities of $99,000 for the six-month period ended June 30, 2019. In April 2020, we received approximately $890,000 in proceeds from the PPP Loan issued pursuant to the Small Business Administration Paycheck Protection Program of the Coronavirus Air, Relief and Economic Security Act of 2020 (the “CARES Act”). These funds were made available to qualifying companies to help cover payroll, rent and other costs to assist companies in managing the economic impact of the COVID-19 pandemic. We also received $2,000 in proceeds provided by the exercise of employee stock options in 2020 and used $170,000 in the purchase of stock related to tax obligations around option exercises and vesting of restricted shares in 2020. In 2019 there was $54,000 received from the exercise of employee stock options and $153,000 used in the purchase of stock related to tax obligations around the option exercises.

 

19

 

We intend to apply to our bank for forgiveness of some or all of the PPP Loan, with the amount which may be forgiven equal to the sum of eligible payroll costs, mortgage interest, covered rent, and covered utility payments, in each case incurred by us during the eight-week period following the effective date of the loan, calculated in accordance with the terms of the CARES Act. Certain reductions in our payroll costs during the eight-week period may reduce the amount of the PPP Loan eligible for forgiveness. There is no guarantee that we will receive forgiveness for any fixed amount of any PPP Loan proceeds.

 

Future Uses of Cash

 

Our primary liquidity and capital requirements are to fund working capital for 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, trade credit extended to us by our vendors, and 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 acquire additional businesses as a way to increase the scale of our operations, or if there is a sudden increase in the level of reseller services. There is no guarantee, however, that such capital would be available on terms acceptable to us.

 

Off-Balance Sheet Arrangements

 

As at June 30, 2020 we had no off -balance sheet arrangements.

 

Critical Accounting Policies and Pronouncements

 

There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2019 with the exception of the adoption and evaluation of the adoption date and the impact of the adoption of recently issued accounting pronouncement guidance on our consolidated financial statements and disclosures. See also Item 1. Financial Statements Note 1 – Significant Accounting Policies regarding Recent Accounting Pronouncements.

  

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Our management performed an evaluation under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of June 30, 2020. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of June 30, 2020, the Company’s disclosure controls and procedures were effective such that information relating to the Company (including its combined subsidiaries) required to be disclosed in the Company’s SEC reports (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding financial disclosures.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting for the three month period ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act of 1934, as amended.

 

20

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Currently, we are not a party to any material litigation in any court, and management is not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business. We currently believe that any ultimate liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

 

Item 1A. Risk Factors.

 

The COVID-19 pandemic has and will likely continue to negatively affect various aspects of our business and has and will likely continue to result in reduced demand from our customers as their businesses may also be negatively affected.

 

The onset of the COVID-19 pandemic has had an immediate and ongoing impact on our operations in our facilities segment and systems integration segment. Ongoing restrictions due to the pandemic could continue to negatively impact our facilities segment as we are unable to travel or face restricted access to customer sites to perform services. For example, a significant customer of this segment has restricted access to its data centers sites, which prevented us from deploying new modular data centers and performing other activities for this customer which contributed to a 26% reduction in revenues in our facilities segment in the first six-months of 2020 compared to the prior year. During the first and second quarters of 2020, our systems integration segment experienced a number of project delays caused by interruptions in our largest customer’s supply chain. This customer was unable to source the necessary IT components for many of its jobs because of the effects of the pandemic on production facilities in China. These interruptions prevented us from performing integration services on those projects and also delayed our ability to complete reseller services for some of our customers. We also incurred additional personnel and operating costs to meet health and safety guidelines imposed because of the COVID-19 pandemic so that we could continue to operate our integration facility throughout the pandemic. The Company does not know how long the travel restrictions and logistical and supply-chain issues will continue as a result of the COVID-19 pandemic. To the extent these restrictions continue or we or our customers have further supply chain challenges for the foreseeable future, the effects on our business, results of operations, and financial condition could be material.

 

Item 6. Exhibits. 

 

10.1* Business Loan Agreement (Asset Based), dated June 24, 2020, between the Company and Texas Capital Bank, National Association
   

31.1*

Certification of TSS, Inc. Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

Certification of TSS, Inc. Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1**

 

32.2**

Certification of TSS, Inc. Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Certification of TSS, Inc. Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 


 

101.INS *

XBRL Instance Document

101.SCH *

XBRL Taxonomy Extension Schema

101.CAL *

XBRL Taxonomy Extension Calculation Linkbase

101.DEF *

XBRL Taxonomy Extension Definition Linkbase

101.LAB *

XBRL Taxonomy Extension Label Linkbase

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase

 

   

*

Filed herewith.

 

**

Furnished herewith.

 

21

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

TSS, INC.

 

 

 

Date: August 14, 2020

By:

/s/ Anthony Angelini

 

 

Anthony Angelini

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

     
 

By:

/s/ John K. Penver

   

John K. Penver

   

Chief Financial Officer

   

(Principal Financial Officer)

 

22

Exhibit 10.1

 

BUSINESS LOAN AGREEMENT (ASSET BASED)

 

Principal

Loan Date

Maturity

Loan No

Call/Coll

Account

Officer

Initials

$1,500,000

12-31-2018

12-31-2020

     

MJL

 

References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. An item above containing “***” has been omitted due to text length limitations.

 


 

Borrower:

TSS, Inc.

Lender:

Texas Capital Bank National Association

 

110 E. Old Settlers Road

 

Austin Office, Commercial Banking

 

Round Rock, TX 78664

 

98 San Jacinto Center

     

Suite 200

     

Austin, TX 78701

     

(512) 305-4000

 


 

THIS BUSINESS LOAN AGREEMENT (ASSET BASED) dated June 24, 2020 is made and executed between TSS, Inc. (“Borrower”) and Texas Capital Bank, National Association (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule to this Agreement. Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements, as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall eb and remain subject to the terms and conditions of this Agreement.

 

TERM. This Agreement shall be effective as of June 24, 2020 and shall continue in full force and effect, until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorney’s fees, and other fees and charges, or until December 31, 2020.

 

ADVANCE AUTHORITY. The following person or persons are authorized, except as provided in this paragraph, to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender’s address shown above, written notice of revocation of such authority: Anthony Angelini, Chief Executive Officer & Secretary of TSS, Inc., and John K. Penver. Chief Financial Officer of TSS, Inc.. Interest will be charged from the date of each advancement on the amount of each advancement. All scheduled interest payments shall be current prior to advances being made; and upon lending officer’s approval.

 

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows:

 

Conditions Precedent to Each Advance. Lender’s obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender.

 

 

(1)

Lender shall have received evidence that this Agreement all Related Documents have been duly authorized, executed and delivered by Borrower to Lender.

 

(2)

Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request.

 

(3)

The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect.

 

(4)

All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender and be in full force and effect.

 

(5)

Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower’s Accounts, books, records, and operations, and Lender shall be satisfied as to their condition.

 

(6)

Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable.

 

(7)

There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificated call for I the paragraph below titled “Compliance Certificate”.

 

Making Loan Advances. Advances under this credit facility, as well as directions for payments from Borrower’s accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day.

 

 

 

Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid.

 

Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower’s account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower’s receipt of any such statement which Borrower deems to be incorrect.

 

COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require. Lender’s Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to the Lender:

 

Perfection of Security Interests. Borrower agrees to execute all documents perfecting Lender’s Security Interests and to take whatever actions are requested by Lender to perfect and continue Lender’s Security Interests in the Collateral. Upon request of the Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fac for the purpose of executing any documents necessary to perfect, or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of Lender’s security interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower’s Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower’s principal governance office or should Borrower merge or consolidate with any other entity.

 

Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender’s representatives upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts (Receivables) are or will be located at company headquarters. The above is an accurate and completed list of all locations at which Borrower keeps or maintains business records concerning Borrower’s collateral.

 

Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and schedules of Eligible Accounts in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: With respect to Eligible Accounts, schedules shall be delivered Monthly within thirty (30) days. Only required if there is a balance outstanding or there is a pending request.

 

Representations and Warranties Concerning Accounts. With respect to he Accounts, Borrower represents and warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time, and at Borrower’s expense to inspect, examine, and audit Borrower’s records and to confirm with Account Debtors the accuracy of such Accounts.

 

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

 

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 110 E. Old Settlers Road, Round Rock, TX 78664. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization, or any change in Borrower’s name. Borrower shall do all things necessary to preserve, and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

 

 

 

Assumed Business Names. Borrower has filed or recorded all Documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed names under which Borrower does business: None.

 

Authorization. Borrower’s execution, delivery and performance of this Agreement and all of the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

 

Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

 

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

 

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

 

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b0 any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in accordance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and test as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify, defend and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses with Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous wasted or substance on the Collateral. The provisions o this section of the Agreement, including the obligation to indemnify and defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

 

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

 

Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

 

Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

 

 

 

Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives, and assigns, and are legally enforceable in accordance with their respective terms.

 

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

 

Notices of Claims and Litigation. Promptly inform Lender in writing of (10 all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

 

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

 

Financial Statements. Furnish Lender with the following:

 

Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

 

Interim Statements. As soon as available, but in no event later than forty-five (45) days after the end of each fiscal quarter, Borrower’s balance sheet and profit and loss statement for the period ended, prepared by Borrower.

 

Additional Requirements.

 

Borrowing Base Certificate. If there is an outstanding balance or a pending advance request, within thirty (30) days after each month end, Borrower shall deliver to Lender a borrowing base certificate, in form and detail satisfactory to Lender, along with such supporting documentation as Lender may request, including without limitation, an accounts receivable aging report and/or a list or schedule of Borrower’s accounts receivable, inventory and/or equipment.

 

FIELD EXAM. Borrower agrees to field exam at Lender’s discretion, performed by the Lender at the Borrower’s expense.

 

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

 

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

 

Additional Requirements.

 

Depository Relationship. Establish and maintain its primary operating account (s) with Lender.

 

FIXED CHARGE COVERAGE RATIO. Maintain a minimum ration of 1.25 to 1.00. Fixed Charge Coverage Ratio will be calculated quarterly and is defined as the trailing twelve month earnings before interest, taxes, depreciation and amortization minus non-recurring gains and income less unfinanced capital expenditures divided by any principal payments made during the trailing twelve period with the exception of RLOC pay downs plus cash interest payments. This ration will only be calculated if principal payments are made on any debt excluding payments made on the subject line of credit, Dell financing arrangement. CAPEX in the definition will include a one-time carve out for the recording of any newly signed office lease liability.

 

Total Leverage Ratio: Maintain a maximum ratio of 3.00 to 1.00. The Total Leverage Ratio will be calculated quarterly and is defined as total funded debt divided by the trailing twelve months earnings before interest, taxes, depreciation and amortization minus non-recurring gains and income. Debt will exclude lease liabilities associated with leased offices.

 

Total Interest Coverage Ratio. Maintain a minimum ratio of 2.50 to 1.00. If not, TSS, Inc. may satisfy this requirement by meeting a 1.25 minimum Total Interest Coverage Ratio and maintaining unrestricted liquidity for the greater of (i) $2,000,000 or (ii) 2 times the outstanding balance on the Revolving Line of Credit. The Total Interest Coverage Ratio will be calculated quarterly and is defined as the trailing twelve month net income plus interest, taxes, depreciation and amortization minus any non-recurring gains minus unfinanced capital expenditures divided by cash interest payments. Capital expenditures in the ratio will include a one-time carve-out for the recording of any newly signed office lease liability.

 

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations in form, amounts, and coverages reasonably acceptable to Lender and by insurance companies authorized to transact business in Texas. BORROWER MAY FURNISH THE INSURANCE REQUIRED BY THIS AGREEMETN WHETHER THROUGH EXISTING POLICIES OWNED OR CONTROLLED BY BORROWER OR THROUGH EQUIVALENT COVERAGE FROM ANY INSURANCE COMPANY AUTHORIZED TO TRANSACT BUSINESS IN TEXAS. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

 

 

 

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

 

Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantors named below, on Lender’s forms, and in the amounts and under the conditions set forth in those guaranties.

       

  Names of Guarantors Amount 
     
  VTC, L.L.C. Unlimited
  Vortech, L.L.C. Unlimited

 

Other Agreements. Comply with all terms and conditions of al other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

 

Loan Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary by Lender in writing.

 

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claims so long as (1) the legality of the same shall be contested in good faith by appropriate proceedings, and (2) Borrower shall have established on Borrower’s books adequate reserves with respect to such contested assessment, tax, charge, levy, lien or claim in accordance with GAAP.

 

Performance. Perform and comply, in a timely manner, with all terms, conditions and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

 

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and managerial personnel; provide written notice to Lender of any change in executive and managerial personnel; conduct its business affairs in a reasonable and prudent manner.

 

Environmental Studies .Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be required by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

 

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation or withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

 

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts and records and to make copies and memoranda of Borrower’s books, accounts and records. If Borrower nor or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

 

 

 

Compliance Certificates. Unless waived in writing by Lender, provide Lender within forty-five (45) days after the end of each fiscal quarter, with a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Events of Default exists under this Agreement.

 

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

 

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

 

LENDERS EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provisions of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender, on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interest, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures paid by Lender for such purposes will then bear interest at the Note rate from the date paid by Lender to the date of repayment by Borrower. To the extent permitted by applicable law, all such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

 

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

 

Additional Financial Restrictions.

 

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, in excess of the aggregate amount of $250,000.00 per fiscal year (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

 

Maintain Basic Business. Maintain the current business activities in which Borrower is presently engage.

 

Transfer of Assets. Transfer, sell or otherwise dispose of any of Borrower’s assets to another entity.

 

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge or restructure as a legal entity (whether by division or otherwise), consolidate with or acquire any other entity, change its name, convert to another type of entity or redomesticate, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

 

CESSAION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or Guarantor has with Lender, (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.

 

 

 

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts.

 

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

 

Payment Default. Borrower fails to make any payment when due under the Loan.

 

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

 

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

 

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or become false or misleading at any time thereafter.

 

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

 

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) ant any time and for any reason.

 

Creditor of Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

 

Events Affecting Guarantor. Any of the preceding events occur with respect to any Guarantor of any of the Indebtedness or any Guarantor dies, becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtednes.

 

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

 

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

 

Insecurity. Lender in good faith believes itself insecure.

 

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s rig to declare a default and to exercise its rights and remedies.

 

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

 

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

 

 

 

Attorneys’ Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit, including Lender’s reasonable attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower shall also pay all court costs and such additional fees as may be directed by the court.

 

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

 

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interest. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligations under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

 

Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Texas without regard to its conflict of law provisions. This Agreement has been accepted by Lender in the State of Texas.

 

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

 

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

 

Payment of Interest and Fees. Not withstanding any other provisions of this Agreement or an provision of any Related Document, Borrower does not agree or intend to pay, and Lender does not agree or intend to charge, collect, take, reserve or receive (collectively referred herein as “charge” or “collect”), any amount in the nature of interest or in the nature of a fee for the Loan which would in any way or event (including demand, prepayment, or acceleration) cause Lender to contract for, charge or collect more for the Loan than the maximum Lender would be permitted to charge or collect by any applicable federal or Texas state law. Any such excess interest or unauthorized fee will, instead of anything stated to the contrary, be applied first to reduce the unpaid principal balance of the Loan, and when the principal has been paid in full, be refunded to Borrower.

 

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

 

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries of affiliates.

 

 

 

Successors and Assigns. All covenants and agreements by or behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

 

Survival of Representations and Warranties. Borrower understand and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

 

Time is of the Essence. Time is of the essence in the performance of this Agreement.

 

Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

 

Additional Eligible Accounts. The words “Eligible Accounts” shall also mean at any time, all of Guarantor’s Accounts which contain selling terms and conditions acceptable to Lender.

 

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting word and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

 

Account. The word “Account” means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third part grantor acceptable to Lender).

 

Account Debtor. The words “Account Debtor” mean the person or entity obligated upon an Account.

 

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf under the terms and conditions of this Agreement.

 

Agreement. The word “Agreement” means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time.

 

Borrower. The word “Borrower” means TSS, Inc. and includes all co-signers and co-makers signing the Note and all their successors and assigns.

 

Borrowing Base. The words “Borrowing Base” mean, as determined by Lender from time to time, the lesser of (1) $1,500,000.00 or (2) 80% of the aggregate amount of Eligible Accounts.

 

Business Day. The words “Business Day” mean a day on which commercial banks are open in the State of Texas.

 

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement.

 

Eligible Accounts. The words “Eligible Accounts” mean at any time, all of Borrower’s Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Accounts against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include:

 

 

(1)

Accounts with respect to which the Account Debtor is employee or agent of Borrower.

 

(2)

Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers or directors.

 

(3)

Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional.

 

 

 

 

(4)

Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender.

 

(5)

Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower.

 

(6)

Accounts which are subject to dispute, counterclaim, or setoff.

 

(7)

Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor.

 

(8)

Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory.

 

(9)

Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due.

 

(10)

Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States.

 

(11)

Accounts which have not been paid in full within ninety (90) days from the invoice date. The entire balance of any Account of any single Account Debtor will be ineligible whenever the portion of the Account which has not been paid within ninety (90) days for the invoice date is in excess of 25.000% of the total amount outstanding on the Account.

 

(12)

That portion of the Accounts of any single Account Debtor which exceeds 25.000% of all of Borrower’s Accounts.

 

(13)

Retainage.

 

(14)

Bonded Contracts.

 

(15)

Dell as long as Citi/Dell Vendor financing program is being used.

 

(16)

Customer Deposits.

 

(17)

For any single Account Debtor with a deferred revenue balance, the deferred revenue balance will be excluded from that single Account Debtor’s total Accounts balance.

 

(18)

The portion of the Accounts of any single investment grade rating Account Debtor which exceeds 30.00% of all Borrower’s and Guarantor’s Accounts. Item number 12 above refers to non-investment grade rating Account Debtors.

 

Environmental Laws. The words “Environmental Laws” mean any all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et. Seq. (”CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery act, 42 U.S.C. Section 6901, et. Seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

 

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

 

Expiration Date. The words “Expiration Date” mean the date of termination of Lender’s commitment to lend under this Agreement.

 

GAAP. The word “GAAP” means generally accepted accounting principles.

 

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

 

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

 

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

 

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported, or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

 

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

 

Lender. The word “Lender” means Texas Capital Bank, National Association, its successors and assigns.

 

 

 

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

 

Note. The word “Note” means the Note dated June 24, 2020 and executed by TSS, Inc. in the principal amount of $1,500,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

 

Primary Credit Facility. The words “Primary Credit Facility” mean the credit facility described in the Line of Credit section of this Agreement.

 

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hearafter existing, executed in connection with the Loan.

 

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

 

Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract or otherwise.

 

 

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED JUNE 24, 2020.

 

BORROWER:

 

TSS, INC.

 

By.  /s/ Anthony Angeline     

President, Chief Executive Officer     

& Secretary of TSS, Inc.

By: /s/ John K. Penver

Chief Financial Officer of TSS, Inc.

 

 

LENDER:

 

TEXAS CAPITAL BANK, NATIONAL ASSOCIATION

 

By: /s/ Monica Fernandes, Senior Vice President

 

 

Exhibit 31.1

 

CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER

UNDER SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002

 

I, Anthony Angelini, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of TSS, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):

 

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 14, 2020

By:

/s/ Anthony Angelini

 

 

Anthony Angelini

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

Exhibit 31.2

 

CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER

UNDER SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002

 

I, John K. Penver, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of TSS, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):

 

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 14, 2020

By:

/s/ John K. Penver

 

 

John K. Penver

 

 

Chief Financial Officer

(Principal Financial Officer)

 

 

Exhibit 32.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

 

In connection with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Report”) of TSS, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Angelini, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Date: August 14, 2020

By:

/s/ Anthony Angelini

 

 

Anthony Angelini

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Exhibit 32.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

 

In connection with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Report”) of TSS, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John K. Penver, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

 

Date: August 14, 2020

By:

/s/ John K. Penver

 

 

John K. Penver

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)