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What changed in TSS, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of TSS, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+223 added−220 removedSource: 10-K (2024-03-29) vs 10-K (2023-03-31)

Top changes in TSS, Inc.'s 2023 10-K

223 paragraphs added · 220 removed · 145 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeOur headcount in sales and marketing has fluctuated as we have worked to align the skill sets with our evolving service offerings, leverage partner relationships and increase the consultative capability of our sales organization. 3 Maintaining key alliances is also crucial to sales development and growth and often provides us with introductions to the customers of our alliance partners.
Biggest changeWe also seek to enhance our name recognition using improved web marketing, trade shows, technical seminars, direct mailings, and social media. 3 Our headcount in sales and marketing has been very selective and targeted to align the skill sets with our evolving service offerings, leverage partner relationships and increase the consultative capability of our sales organization.
Our service contracts take different forms including fixed-price equipment maintenance with optional comprehensive warranty to fix failures in key components such as uninterruptible power supplies or batteries, ticket-based service provided at contracted rates in a master service agreement, comprehensive facility services agreements that include on site staffing, scheduled equipment maintenance and nontechnical facility services, and direct job-specific contracts for additional moves, add, refresh, refurbishment and change work within a facility.
Our service contracts take different forms including fixed-price equipment maintenance with an optional comprehensive warranty to fix failures in key components such as uninterruptible power supplies or batteries, ticket-based service provided at contracted rates in a master service agreement, comprehensive facility services agreements that include on-site staffing, scheduled equipment maintenance and nontechnical facility services, and direct job-specific contracts for additional moves, add, refresh, refurbishment and change work within a facility.
In addition, we provide 24X7 Network Operations support from our Round Rock, Texas facility that has the capability of remotely monitoring our data center service contract customers’ facilities for systems operations and emergency events that could lead to outages. Temperature levels, humidity, electrical connectivity, power usage and fire alarm conditions are among the items monitored.
In addition, we provide 24x7 network operations support from our Round Rock, Texas facility which has the capability of remotely monitoring our data center service contract customers’ facilities for systems operations and emergency events that could lead to outages. Temperature levels, humidity, electrical connectivity, power usage, and fire alarm conditions are among the items monitored.
These solutions begin with strategies for the care of information technology assets that are being housed in the facility or modular data centers, including power, cooling and heat rejection, as well as disaster recovery backup systems.
These solutions begin with strategies for the care of information technology assets that are housed in the facility or modular data centers, including power, cooling, and heat rejection, as well as disaster recovery backup systems.
These procurement and reseller activities allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher margins on integration projects by broadening our revenue and customer base.
These procurement activities allow us to develop relationships with new hardware, software, and professional service providers and allow us to generate higher margins on integration projects by broadening our revenue and customer base.
In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction.
In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software, or services that are to be provided to our customers by another party. However, we have no control over the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction.
In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commissions that we expect to be entitled to after paying the other party for the goods or services provided to the customer.
In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer.
Almost all of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers, thus our revenues reflect only the services we perform, and the consigned components are not reflected in our balance sheet.
Most of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers, thus our revenues reflect only the services we perform, and the consigned components are not reflected in our balance sheet.
The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 4
The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 5
Deployment: In connection with the deployment of a customer’s data center or related equipment requirements, our capabilities include project management, value engineering and design management, bid negotiation support, subcontractor pre-qualification and selection, long-lead equipment procurement, issuance of equipment and construction contracts, and refinement and management of project budgets and schedules.
Deployment: In connection with the deployment of a solution within a customer’s existing data center, modular data center or related equipment requirements, our capabilities include project management, value engineering and design management, bid negotiation support, subcontractor pre-qualification, and selection, long-lead equipment procurement, issuance of equipment and construction contracts, and refinement and management of project budgets and schedules.
Procurement and Reseller Services: We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer.
Strategic Procurement Services: We generate revenues from fees we charge our customers to procure third-party hardware, software, and professional services on their behalf that are used in our integration services as we integrate these components to deliver a completed system to our customers.
We are generally not responsible for the performance of the related equipment in the field. In addition, we provide warehousing of high value equipment such as servers, switches and other information technology hardware that are generally provided on a consignment basis to us to by our OEM and end-user customers.
In addition, we provide warehousing of high-value equipment such as servers, switches, and other information technology hardware that are generally provided on a consignment basis to us by our OEM and end-user customers.
These procurement and reseller services enable highly customizable solutions for our OEM and end-user customers and enable us to generate larger revenues and profits while expanding our customer base. We recognize our reseller services revenue upon completion of the procurement activity.
These procurement services enable highly customizable solutions for our OEM and end-user customers and enable us to expand our revenues and profits and our customer base. We recognize our procurement services revenue upon completion of the procurement activity.
As computer density increased and data centers evolved into the use of modular form factors, we found that we could leverage our facilities maintenance experience and infrastructure by offering maintenance service of modules being deployed into new data centers. The number of modular units under our service contracts has continued to expand.
As computer density increases and data centers evolve into the use of modular form factors, we found that we could leverage our facilities' maintenance experience and infrastructure by offering maintenance services for modules being deployed into new data centers. The number of modular units under our service contracts has continued to expand.
Available Information We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements relating to our annual stockholders’ meeting with the Securities and Exchange Commission (“SEC”).
We consider our relationship with our employees to be very satisfactory. 4 Available Information We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements relating to our annual stockholders’ meeting with the Securities and Exchange Commission (“SEC”).
In addition, this installation portion of a project has the largest number of outside influences that can impact project goals and objectives, such as weather, non-performance of subcontractors, equipment deliveries, unexpected project changes from the owner, and influence from local authorities and utility providers. Therefore, management experience, skill and mission focus are critical during the project installation period.
In addition, this installation portion of a project has the largest number of outside influences that can impact project goals and objectives, such as weather, non-performance of subcontractors, equipment deliveries, unexpected project changes from the owner, and influence from local authorities and utility providers.
Customers Our customers include IT OEM equipment, technology and service companies, and private sector businesses that in some cases are the end users of the facility or in other cases are providing a facility to a government or commercial end user. One customer comprised 96% and 95% of our revenues in the years ended December 31, 2022 and 2021, respectively.
Customers Our customers include IT OEM equipment, technology and service companies, and private-sector businesses that in some cases are the end users of the facility, or in other cases are providing a facility to a government or commercial end user.
A key part of our selling strategy is entering into master service agreements with multiple partners and co-selling our range of services to the end-user customers of our partners, leveraging their customer relationships and broadening the scope of potential customers for us.
Sales and Marketing A key part of our selling strategy is entering into master service agreements with multiple partners and co-selling our range of services to our partners’ end-user customers, leveraging their customer relationships and broadening the scope of potential customers for us. Our go-to-market approach formerly relied on business generated by one major OEM customer.
We also provide second-touch services such as adding software, hardware or other features to end-user devices, bundling of such devices with peripherals, pre-loading of customer-determined application software, tagging, asset capture and other fulfilment services for our OEM and end-user customers.
We also provide second-touch configuration services for our OEM and end-user customers, such as adding software, hardware, or other features to end-user devices, bundling such devices with peripherals, pre-loading customer-determined application software, tagging, asset capture, and other fulfillment services. We have added two new service offerings to assist customers with the ongoing management of their IT systems.
Service Offerings We have developed a unique set of solution offerings where we provide a range of services that enable our customers and partners to more efficiently plan, develop, deploy and maintain data centers and their related assets, along with end user systems.
Service Offerings We have developed a unique set of solution offerings where we provide a range of services that enable our customers and partners to efficiently plan, develop, build, deploy, and maintain their IT hardware and software solutions.
Our solutions involve all aspects of the life cycle of both traditional and modular data centers and their related assets and are described in more detail below. 1 Facilities Services: Consulting: During the initial phase of a data center project, we provide project development-related services that typically include establishing project goals and a preliminary budget and schedules, setting technical parameters and requirements, and determining project team members and the overall requirements of the team.
Facilities Services: Consulting: During the initial phase of a data center project, we provide project development-related services that typically include establishing project goals and a preliminary budget and schedules, setting technical parameters and requirements, and determining project team members and the overall requirements of the team.
Our mission critical facilities experience and our personnel skills position us as a trusted advisor to our customers and allow us to work on new opportunities as our customers grow or as their facilities mature and as partners introduce us to new client opportunities.
Our mission-critical facilities experience and our personnel skills position us as trusted advisors to our customers and allow us to work on new opportunities as our customers grow or as their facilities mature and as partners introduce us to new client opportunities. We also intend to increase our efforts at establishing direct selling and business relationships within the market.
Management: We provide a comprehensive maintenance and service offering designed to ensure that the multiple systems critical to sustaining on-line applications in technologically intensive facilities and modular data centers remain operational and functional.
Therefore, management experience, skill, and mission focus are critical during the project installation period. 2 Maintenance and management: We provide a comprehensive maintenance and service offering designed to ensure that the multiple systems critical to sustaining online applications in enterprise data centers and modular data centers remain operational and functional.
We also offer our customers the ability to procure third-party hardware, software and services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer.
We also offer our customers strategic procurement services whereby we procure third-party hardware, software, and services on their behalf. Our configuration and integration service businesses integrate these components to deliver a complete system to our customers.
These services include custom configuration of a broad scope of information technology products including client products, enterprise products, clusters and modular containers. The integration of this equipment at both a rack-level or modular data center level is performed to our customer specifications and test criteria and may include imaging of software onto the hardware as well.
The integration of this equipment at both a rack-level or facility or modular data center level is performed to our customer specifications and test criteria and may include imaging of software onto the hardware as well. We are generally not responsible for the performance of the related IT equipment in the field.
These alliances reside with various information technology consulting firms, specialty mission-critical engineering firms, application service providers and internet service providers. Key alliance opportunities also reside in other firms within the market sector such as equipment manufacturers, product suppliers, property management firms, developers, information technology system integrators and firmware providers.
Key alliance opportunities also reside in other firms within the market sector such as equipment manufacturers, product suppliers, property management firms, developers, information technology system integrators, and firmware providers. We are focused on expanding our strategic alliances with information technology corporations to provide engineering, design, construction management services, systems integration, modular solutions, and facility management services.
The information is useful to our customers in assessing operational efficiency and causes of failure and enables them to make critical decisions on repair or replacement strategies based on the operating history of the monitored systems. 2 Our facilities maintenance service contracts are typically one to three years in duration with cancellation clauses for nonperformance and are typically billed annually in advance.
The system maintains all site documentation for repairs and maintenance performed on each critical piece of equipment covered under our services. The information is useful to our customers in assessing operational efficiency and causes of failure and enables them to make critical decisions on repair or replacement strategies based on the operating history of the monitored systems.
These offerings also include post commissioning support of on-going operations. Our strategy is intended to increase the amount of recurring revenues we generate from our existing customers, IT equipment partners, and major systems integrators.
These offerings also include post-commissioning support for ongoing operations. Our strategy is to increase the number of customers and modular data centers under contract so that we can increase the amount of recurring revenues from ongoing design, maintenance, and support contracts.
Systems Integration Services: To assist our customers with IT-equipment deployment in their data centers we provide what we call “systems integration” services. We provide integrated technology services and software tools designed to accelerate the delivery of complex information technology solutions.
Our solutions involve all aspects of the life cycle of both traditional and modular data centers and their related assets which are described in more detail below. 1 Systems Integration Services: To assist our customers with ITequipment deployment in their data centers we provide what we call “systems integration” services.
We are not a party to any collective bargaining agreement, and we have not experienced any strikes or work stoppages. We consider our relationship with our employees to be satisfactory.
Employees On December 31, 2023, we had 81 full-time employees. Our future success will depend on our continued ability to attract, retain, and motivate qualified personnel. We are not a party to any collective bargaining agreement, and we have not experienced any strikes or work stoppages.
Competition The mission-critical information technology solutions market is large, fragmented and highly competitive. We compete for contracts based on the strength of our customer relationships, successful past performance record, significant technical expertise, specialized knowledge and broad service offerings. We often compete against divisions of large information technology service and equipment providers of various sizes.
We compete for contracts based on the strength of our customer relationships, successful past performance, significant technical expertise, specialized knowledge, and broad service offerings. Our strength lies in our ability to deliver quality solutions on time and with high quality at a competitive price. These solutions can be complex or simple.
We have key strategic alliances with large information technology corporations to provide engineering, design, construction management services, systems integration, modular solutions and facility management services. As we expand our reseller services, we are also establishing alliances with new hardware and software providers who operate in the IT infrastructure market.
As we expand our configuration services business, we expect this will help us establish alliances with new hardware and software providers who operate in the IT infrastructure market. Competition The mission-critical information technology solutions market is large, fragmented, and highly competitive.
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Item 1. Business Company Overview TSS, Inc. provides a range of comprehensive services to enable the planning, design, deployment, maintenance, and refurbishment of end-user and enterprise systems, including the mission-critical facilities they are housed in.
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Item 1. Business Company Overview TSS, Inc. provides a broad and specialized range of integration technology services that enable enterprises and users to successfully implement, operate, and maintain their Information Technology systems. As a provider of technology services built on a platform of experienced program management, we have expertise in delivering complex, end-to-end IT technology solutions cost-effectively.
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We provide a single-source solution for enabling technologies in data centers, operation 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, system installations, facilities management and IT procurement and reseller services.
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These IT solutions can be deployed in various physical settings such as data centers, co-location facilities, server rooms, modular or edge-based solutions, security operations, and communications facilities.
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We were incorporated in Delaware in December 2004. Our headquarters and our systems integration facility are located in Round Rock, Texas. Our business is concentrated on the data center infrastructure and services market. This market remains highly competitive as commerce continues to move to cloud-based solutions and as data storage and compute requirements continue to escalate for many industries.
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Our services include rack and systems integration, configuration services, data center and modular data center facility management integration, deployment and maintenance services, strategic procurement services, project management and technology consulting, and design and engineering services. TSS was incorporated in Delaware in December 2004. Our headquarters and our systems integration and configuration services facility are located in Round Rock, Texas.
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These underlying macroeconomic trends are driving demand for more information technology equipment, and more efficient data center design and operations, resulting in continued overall growth in this market. We compete in large growing market segments, often against larger competitors who have greater resources.
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We support a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDC), in colocation facilities or at the edge of the network.
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We rely on several large customers to win contracts and to provide business to us under “Master Service Agreements”, and the loss of any such customers could have a material negative effect on our results.
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This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more computing and storage capacity. In 2023 these enterprises shifted their investment priorities towards artificial intelligence (AI) and accelerated computing infrastructure initiatives.
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In particular, we are focused on the cloud IT infrastructure market with emphasis on the modular data center area, and we have concentrated our activities around our systems integration and facilities maintenance businesses.
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Enterprises and data center operators face immense pressure to integrate and deploy the latest AI equipment and graphic processing units (GPUs). They must adopt these next-generation servers and custom rack-scale architectures to compete in the market successfully and quickly.
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We have also developed and expanded our rack integration, imaging and logistic services to increase the overall utilization of our systems integration facility and to insulate us from the variable timing of modular data center orders.
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Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.
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This simplification of our business and the focus towards the modular data center market has increased our customer concentration and concentrated the markets in which we compete.
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Over the last ten years, we have focused our business on providing world-class integration services to our customer base.
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The system maintains all site documentation for repairs and maintenance performed on each critical piece of equipment covered under our services.
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As computing technologies evolve, and as we currently see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our rack and systems integration businesses to support these new products.
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Sales and Marketing Our marketing approach emphasizes expertise in information technology hardware systems, energy consumption, real estate matters and facilities planning and operation. This marketing approach allows the customer to contract for comprehensive facilities services or to contract separately for each individual project phase.
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We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM customer to win contracts and to provide business to us under “Master Service Agreements”.
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Our marketing program seeks to capitalize on our industry standing, including our existing relationships and our reputation based upon our performance on completed projects. We also seek to enhance our name recognition through the use of trade shows, technical seminars, direct mailings and the media.
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The loss of this customer could have a material negative effect on our results. Our operational focus is to ensure this doesn’t happen.
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Some of these competitors are large, well-established companies that have broader geographic scope and greater financial and other resources than us. In some cases, because of diverse requirements, we frequently collaborate with these and other competitors for large projects. We expect competition in the information technology services sector to continue to increase in the future.
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We provide integrated technology services and software tools designed to accelerate the assembly and delivery of complex information technology solutions. These services include custom configuration of a broad scope of information technology products including client products, enterprise products, clusters, and modular containers.
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Because of the breadth of services that we provide, we face many different competitors some of which are our customers or vendors. We believe that, while we face large and small competitors across the spectrum of our service offerings, we are uniquely positioned to provide services to IT and facilities across both modular and traditional data center markets.
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These include services to move or relocate equipment between locations, and specialized cabling solutions to link or integrate rack-level products and customer cabling and labeling services.
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We believe by providing a single source solution focused in the data center market allows us to meet our customer’s requirements cost effectively. Employees At December 31, 2022, we had 70 full-time employees. Our future success will depend significantly on our ability to attract, retain and motivate qualified personnel.
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Our facilities maintenance service contracts can be tailored to customer requirements and typically span one to three years in duration with cancellation clauses for nonperformance and are typically billed annually in advance.
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While this business was and remains valued, it has been difficult to forecast resulting in inconsistent and fluctuating quarterly results. This approach relied on expertise in information technology hardware systems, energy consumption, real estate matters, and facilities planning and operation from this primary demand source.
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This marketing approach allowed the end–user customer to contract for comprehensive facilities services or to contract separately for each project phase such as integration or fulfillment services. Our updated go-to-market strategy is designed to capitalize on our investment in direct selling personnel and leveraging our OEM partner’s capabilities at the same time.
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Our ability to be involved in sales engagements earlier in the cycle and with end-users will allow us to positively impact demand and provide greater visibility into the integration schedules and future pipeline. This impacts our ability to better manage personnel schedules and ultimately optimize our production capacity.
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Maintaining key alliances and creating new partnerships is an important part of our sales development and growth plan. These alliances reside with various information technology consulting firms, specialty mission-critical engineering firms, application service providers, and internet service providers.
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We have gained traction by providing complex AI solutions utilizing GPU and advanced thermal management technology. We often compete against channel re-sellers and divisions of large information technology service and equipment providers. In some cases, because of diverse requirements, we collaborate with these and other competitors for projects.
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We respect competition in the information technology services sector, and we embrace what we need to do to compete and win to continue to increase in the future.
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Strategy Our goal is to profitably grow our existing businesses and to identify expanded service offerings to further our value add to our customers as we become a recognized leader in the life-cycle management of complex IT solutions.
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At a high level, the strategy we intend to use to accomplish this goal include: - Expand our ability to drive demand with direct and selling resources and to co-sell with our customers and partners.
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We believe we can expand our services portfolio penetration within these new, as well as existing customers. - Maintain intense customer focus: We intend to strengthen and deepen our customer relationships. We believe that continued focus on cost-effective systems integration, deployment, and ongoing life-cycle management is important, and will help to increase our net sales, operating performance, and market share.
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To accomplish this, we intend to continue our close collaboration with our OEM partner to assist them in identifying demand for our services and design new services that allow them to meet new customer requirements and leverage innovations and technical developments.
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Additionally, we will continue to expand our sales force and field service technicians and add additional technical expertise. - Continue to deliver operational excellence and cost competitiveness and enhance our manufacturing capability. A key element of our success is our ability to leverage and optimize our systems integration facility.
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We will continue to invest in our integration processes and technology to achieve additional cost efficiencies and enhance our existing capabilities. We are expanding to a hybrid integration model which allows us to generate revenues from within our facility and externally at customer locations.
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This allows more flexibility to support our customers’ requirements while continuing to enhance our cost-effectiveness. - Pursue selective strategic partnerships and acquisitions: As part of our strategy to expand our service offerings and to maximize our market opportunities, we may partner with or acquire technologies, services, or product lines to accelerate our growth and to enhance our portfolio.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOur history suggests that customers will replace MDC’s with new MDC modules that will also be subject to an annual maintenance contract. However, the time-period between these two events could result in an overall decrease in our level of maintenance revenues and our overall level of revenue in our facilities business.
Biggest changeWhile our history suggests that customers will replace MDCs with new modules subject to annual maintenance contracts, the time period between these two events could result in a decrease in our maintenance and overall revenue in our facilities business. 7 We have substantial amounts of goodwill, and changes in future business conditions could cause these assets to become impaired, requiring substantial write-downs that would adversely affect our operating results.
The applicable customers may not approve or may contest these change orders and we cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, our results of operations could be adversely impacted.
The applicable customers may not approve or contest these change orders and we cannot assure you that these claims will be approved in whole, in part or at all. If these claims are not approved, our results of operations could be adversely impacted.
Stock sales by our directors and officers are subject to compliance with our Code of Conduct and preapproval process from the Chief Financial Officer. Sales of a substantial number of these shares in the public market could decrease the market price of our common stock.
Stock sales by our directors and officers are subject to compliance with our Code of Conduct and the preapproval process from the Chief Financial Officer. Sales of a substantial number of these shares in the public market could decrease the market price of our common stock.
Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity. We warranty customer equipment against failure in some of our fixed price contracts, and a major equipment failure could have a material impact on our financial performance .
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. 8 We warranty customer equipment against failure in some of our fixed price contracts, and a major equipment failure could have a material impact on our financial performance .
Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares. 9 Our insiders beneficially own a significant portion of our outstanding common stock.
Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares. Our insiders beneficially own a significant portion of our outstanding common stock.
This can also harm our liquidity position if we are forced to pay vendors for products and services before we have the ability to invoice and receive payment from our customers, which could also prevent us from performing additional procurement services for our customers or cause other liquidity concerns for the Company.
This can also harm our liquidity position if we are forced to pay vendors for products and services before we have the ability to invoice and receive payment from our customers, which could also prevent us from performing additional procurement services for our customers or cause other liquidity concerns.
Reduced demand for our services or a loss of a significant customer or end-user could adversely affect our results of operations, cash flows and liquidity. 8 We may be unable to hire and retain sufficient qualified personnel and the loss of any of our key executive officers may adversely affect our business.
Reduced demand for our services or the loss of a significant customer or end-user could adversely affect our results of operations, cash flows and liquidity. We may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers may adversely affect our business.
We do not yet have a history of stable and ongoing contracts with customers for our procurement and reseller services and as a result we have experienced material fluctuations in our quarterly revenues from these services, which has had a material impact on our quarterly and annual revenues and profits.
We do not yet have a history of stable and ongoing contracts with customers for our procurement services and, as a result, we have experienced material fluctuations in our quarterly revenues from these services, which has had a material impact on our quarterly and annual revenues and profits.
To the extent we experience significant attrition or the loss of critical employees and are unable to timely replace employees, we could experience a loss of critical skills and reduced employee morale, potentially resulting in business disruptions or increased expenses to address any disruptions.
To the extent we experience significant attrition or the loss of critical employees and are unable to replace employees in a timely manner, we could experience a loss of critical skills and reduced employee morale, potentially resulting in business disruptions or increased expenses to address any disruptions.
We are continuing our efforts to add new revenue streams such as our procurement and reseller services that we began offering in 2019, as well as targeting other vendors in the data center infrastructure market including Value Added Resellers and systems integrators who have the need for IT integration services.
We are continuing our efforts to add new revenue streams such as our strategic procurement services that we began offering in 2019, as well as targeting other vendors in the data center infrastructure market, including Value Added Resellers and systems integrators who have the need for IT integration services.
To the extent we determine that such assets have been impaired, we will write-down their carrying value on our consolidated balance sheet and book an impairment charge in our consolidated statement of operations. At December 31, 2022 and 2021, we conducted such analyses that resulted in no impairment.
To the extent we determine that such assets have been impaired, we will write-down their carrying value on our consolidated balance sheet and book an impairment charge in our consolidated statement of operations. At December 31, 2023 and 2022, we conducted such analyses that resulted in no impairment.
Although we believe that changes we have made to the business in recent years, including the addition of procurement and reseller services and changes to our operating cost structure, have improved our operating results and allowed us to achieve multiple profitable quarters in each of the last several years, we do have a history of fluctuating operating results.
We believe that changes we have made to the business in recent years, including the addition of procurement and reseller services and changes to our operating cost structure have improved our operating results and allowed us to achieve multiple profitable quarters in each of the last several years, but we do have a history of fluctuating operating results.
Our efforts to align costs with sales and gross margin volume have reduced our level of overhead, but there can be no guarantee that we will be successful in sustaining or increasing profitability in 2023 or beyond.
Our efforts to align costs with sales and gross margin volume have reduced our level of overhead, but there can be no guarantee that we will be successful in sustaining or increasing profitability in 2024 or beyond.
After the sale of certain components of our business in 2018 and 2017, our customer concentration increased and revenue from our three largest customers comprised 99% of our total revenues for each of the years ended December 31, 2022 and 2021.
After the sale of certain components of our business in 2018 and 2017, our customer concentration increased and revenue from our three largest customers comprised 99% of our total revenues for each of the years ended December 31, 2023 and 2022.
We have been able to structure our procurement and reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities.
We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities.
Supply chain challenges have and will likely negatively affect our integration business by slowing the supply of parts needed to perform integration services, require us to hold greater quantities of inventory for longer periods and delaying completion of services for our customers.
Supply chain challenges have and will likely negatively affect our integration business by slowing the supply of parts needed to perform integration services, requiring us to hold greater quantities of inventory for longer periods and/or delaying completion of services for our customers.
Although we recorded operating income in 2022, we had a net loss in 2022 and we recorded operating and net losses in both 2021 and 2020. We have a history of recurring net annual losses in prior years and at December 31, 2022 we had an accumulated deficit of approximately $66.4 million.
Although we recorded operating income in 2023 and 2022 and net income in 2023, we had a net loss in 2022 and we recorded operating and net losses in both 2021 and 2020. We have a history of recurring net annual losses in prior years and at December 31, 2023 we had an accumulated deficit of approximately $66.3 million.
As we introduce a new ERP system to perform these functions including our financial reporting and accounting functions, any challenges in the implementation of the system, changes to processes or errors in functionality where such systems fail to adequately perform as designed, could adversely affect our business and harm our operating results or affect our ability to timely and accurately complete our financial reporting.
As we introduce a new ERP system to perform these functions including our financial reporting and accounting functions, any challenges in the implementation of the system, changes to processes or errors in functionality where such systems fail to adequately perform as designed, could adversely affect our business and harm our operating results.
The occurrence of any of these events could harm our business or damage our brand and reputation, lead to loss of customers, higher expenses and possibly impede our present and future success in retaining and attracting new customers. A successful assault on our infrastructure would be damaging to our reputation and could adversely affect our financial condition.
The occurrence of any of these events could harm our business or damage our brand and reputation, lead to the loss of customers and higher expenses, and possibly impede our present and future success in retaining and attracting new customers. 9 A successful assault on our infrastructure damage to our reputation and could adversely affect our financial condition.
In addition, we provide services under certain master service agreements. If these agreements are terminated, we would be unable to provide on-going services to those customers. 7 We submit change orders to our customers for work we perform beyond the scope of some of our contracts.
In addition, we provide services under certain master service agreements. If these agreements are terminated, we would be unable to provide ongoing services to those customers. We submit change orders to our customers for work we perform beyond the scope of some of our contracts.
This has also resulted in us having to hold onto greater quantities of customer inventory for longer time periods while we wait for the missing components to be delivered.
In addition to delaying our services, this has also resulted in us having to hold onto greater quantities of customer inventory for longer time periods while we wait for the missing components to be delivered.
Hiring and retaining qualified executives and other employees is therefore critical to our business. During 2022 we had a number of changes to our executive leadership team, and we have experienced increased wage pressure and challenges in hiring people in the Austin, Texas market. We have had to pay higher wages to attract new employees and retain our existing employees.
Hiring and retaining qualified executives and other employees is therefore critical to our business. During 2022 and 2023 we had a number of changes to our executive leadership team, and we experienced increased wage pressure and challenges in hiring people in the Austin, Texas market.
The uncertainty of a rapidly changing marketplace and the pandemic and subsequent economic slowdown has created a volatile and challenging business climate, which may continue to negatively impact our customers and their spending and investment decisions. We may not be able to generate the level of revenue necessary to achieve and maintain sustainable profitability.
The uncertainty of a rapidly changing marketplace and ongoing global supply challenges have created a volatile and challenging business climate, which may continue to negatively impact our customers and their spending and investment decisions. We may not be able to generate the level of revenue necessary to achieve and maintain sustainable profitability.
If our total compensation programs, employment benefits, and overall workplace culture are not viewed as competitive and inclusive, our ability to attract, retain and motivate employees could be compromised.
We have had to pay higher wages to attract new employees and retain our existing employees. If our total compensation programs, employment benefits, and overall workplace culture are not viewed as competitive and inclusive, our ability to attract, retain and motivate employees could be compromised.
As the age of modular data centers increases and customers look to shut or replace such units, our recurring maintenance revenues could be negatively impacted, and this could adversely affect our operating results. Modular Data Centers (MDC’s) typically have an expected useful life between 6-10 years unless refreshed with new IT equipment.
As the age of modular data centers increases and customers look to shut or replace such units, our recurring maintenance revenues could be negatively impacted, and this could adversely affect our operating results. Modular Data Centers (MDCs) typically have a lifespan of 6-10 years unless they are updated with new IT equipment.
Under generally accepted accounting principles, we do not amortize goodwill and intangible assets acquired in a purchase business combination that are determined to have indefinite useful lives, but instead review them annually (or more frequently if impairment indicators arise) for impairment. We are amortizing certain other intangibles over their useful lives.
We have substantial amounts of goodwill resulting from prior acquisitions of businesses. Under generally accepted accounting principles, we do not amortize goodwill and intangible assets acquired in a purchase business combination that are determined to have indefinite useful lives, but instead review them annually (or more frequently if impairment indicators arise) for impairment.
We are also targeting other vendors in the modular data center market to leverage our expertise and capabilities in this marketplace. We are also trying to stay ahead of emerging trends in the IT marketspace such as liquid-cooled product offerings, immersion technology and edge-based solutions so that we can develop service offerings to leverage growth opportunities for these new markets.
We are also trying to stay ahead of emerging trends in the IT market space such as liquid-cooled product offerings, AI computing, immersion technology and edge-based solutions so that we can develop service offerings to leverage growth opportunities for these new markets.
Future sales of common stock by these insiders may have an adverse effect on the market price of our common stock. Our officers, directors or their affiliates beneficially own approximately 6.3 million shares of common stock or approximately 28% of our outstanding common shares as of March 31, 2023.
Future sales of common stock by these insiders may adversely affect the market price of our common stock. Our officers, directors or their affiliates beneficially own approximately 6.9 million shares of common stock or approximately 30% of our outstanding common shares as of March 28, 2024.
The net carrying value of goodwill totaled $0.8 million at December 31, 2022 and 2021, and the net carrying value of finite lived intangible assets totaled $0.01 million and $0.1 million at December 31, 2022 and 2021, respectively. We operate in a highly competitive industry, which could reduce our growth opportunities, revenue and operating results.
The net carrying value of goodwill totaled $0.8 million at December 31, 2023 and 2022, respectively. We operate in a highly competitive industry, which could reduce our growth opportunities, revenue and operating results. The mission-critical information technology industry in which we operate is highly competitive and continues to become more competitive.
The mission-critical information technology industry in which we operate is highly competitive and continues to become more competitive. We often compete against divisions of large information technology consulting and integration companies, including several that are large domestic companies that may have financial, technical and marketing resources that exceed our own.
We often compete against divisions of large information technology consulting and integration companies, including several large domestic companies that may have financial, technical and marketing resources that exceed our own.
While we believe our efforts will allow us to broaden our customer base and reduce our customer concentration, there can be no guarantee that we will be successful at these endeavors, or of the time that it will take for these efforts to be successful. 6 Our procurement and reseller services business is still evolving and the level of this business may fluctuate significantly on a quarterly basis, requiring additional working capital in order to grow.
While we believe our efforts will allow us to broaden our customer base and reduce our customer concentration, there can be no guarantee that we will be successful at these endeavors, or of the time that it will take for these efforts to be successful.
Any challenges, delays, difficulties or errors during the implementation of this new system may negatively impact our business operation and harm our operating results. We rely on computerized inventory and management systems to coordinate and manage the activities in our integration business, as well as to communicate inventory and shipment information to our vendors and customers.
We rely on computerized inventory and management systems to coordinate and manage the activities in our integration business, as well as to communicate inventory and shipment information to our vendors and customers.
Any failure to maintain and grow our revenue volumes would adversely affect our business, financial condition and operating results. We derive a significant portion of our revenues from one customer. We currently derive and believe that we will continue to derive in the near term a significant portion of our revenues from one OEM customer.
We believe the most significant of these risks and uncertainties are as follows: We derive a significant portion of our revenues from one customer. We currently derive and believe that we will continue to derive in the near term a significant portion of our revenues from one OEM customer.
Our inability to attract, retain and motivate employees or manage succession of key roles may inhibit or ability to maintain or expand our business operations. 5 We are partially through the implementation of a new enterprise resource IT system and have yet to fully deploy this new system across all of our business units.
Our inability to attract, retain and motivate employees or manage succession of key roles may inhibit or ability to maintain or expand our business operations. We have a history of operating losses, and we may experience net losses in the future.
As they approach the end of their expected life, we would expect customers to either perform “refresh” maintenance to extend the operating life of the MDC’s, or to terminate the annual maintenance contracts for those MDC’s which would cause our level of maintenance revenues and our profitability to be negatively impacted unless the units are immediately replaced.
As they near the end of their useful life, customers can either perform maintenance to extend the MDCs' lifespan or terminate maintenance contracts for those MDCs. If customers terminate their annual maintenance contracts, it could negatively impact our maintenance revenues and profitability unless they replace the units with new MDCs immediately.
Revenues from this OEM customer comprised 96% and 95% of our total revenues for the years ended December 31, 2022 and 2021, respectively. We are attempting to diversify our customer base but there is no guarantee that we will be successful in doing so.
Revenues from this OEM customer comprised 96% of our total revenues for each of the years ended December 31, 2023 and 2022.
We began to use this new enterprise system as our system of record on October 1, 2022. We have not yet deployed the system across all of our business units. We have a history of operating losses, and we may experience net losses in the future.
We began to use this new enterprise system as our system of record with effect from October 1, 2022. We are still working to deploy the system across all of our business units and integrate it into our financial reporting systems.
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We believe the most significant of these risks and uncertainties are as follows: If our operating results do not improve, there may be concern about our ability to continue as a going concern. Our consolidated financial statements included in this annual report have been prepared on the basis that we will continue to operate as a going concern.
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Any failure to maintain and grow our revenue volumes would adversely affect our business, financial condition and operating results. 6 We are attempting to diversify our customer base but there is no guarantee that we will be successful in doing so.
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Accordingly, assets and liabilities are recorded on the basis that we will be able to realize our assets and discharge our liabilities in the normal course of business. As of December 31, 2022, we had an accumulated deficit of $66.4 million.
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We are also targeting other vendors in the modular data center market to leverage our expertise and capabilities in this marketplace.
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In addition, although we generated operating income in 2022, we have a history of recurring operating and net losses and negative cash flow from operations which have been due in recent years, in part, to the effects of COVID-19 and related supply chain constraints.
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We are partially through the implementation of a new enterprise resource IT system and have yet to fully deploy this new system across all of our business units. Any challenges, delays, difficulties, or errors during the implementation of this new system may negatively impact our business operation and harm our operating results.
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These factors may, by themselves, cause uncertainty about our ability to continue to operate our business as a going concern. Note 1 to our consolidated financial statements describes the actions we have taken and could take to improve our liquidity to alleviate the doubt about our ability to continue as a going concern.
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Our procurement services business is still evolving, and the level of this business may fluctuate significantly on a quarterly basis, requiring additional working capital in order to grow. We began providing procurement services to our customers in 2019.
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Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarded expected revenues and future costs, and our ability to secure additional sources of funding if needed. However, our revenue may not meet our expectations, or our costs may exceed our estimates.
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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 2023 or significantly affect our level of liquidity, which may require us to take other measures to reduce our operating costs or obtain funding in order to continue operating.
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Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially impact our financial results depending on the level of cost reductions taken.
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The negative impact of the COVID-19 pandemic including on global supply chains and government economic policy decisions has further exacerbated our operating results and there is no certainty regarding how long these factors will continue to negatively impact our operations and financial results.
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Our efforts to successfully add new relationships has been impacted by the COVID-19 pandemic and taken us longer than anticipated.
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We began providing procurement and reseller services to our customers in 2019.
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We have substantial amounts of goodwill and other intangibles, and changes in future business conditions could cause these assets to become impaired, requiring substantial write-downs that would adversely affect our operating results. We have substantial amounts of goodwill and other intangibles resulting from prior acquisitions of businesses.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe believe that any potential liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows. Item 4. Mine Safety Disclosures Not applicable. 10 PART II
Biggest changeWe believe that any potential liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe following table provides information as of December 31, 2022 with respect to shares of our common stock that may be issued under equity compensation plans: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders 640,000 $ 0.18 3,251,708 Equity compensation plans not approved by security holders 1,700,000 0.60 None Total 2,340,000 $ 0.49 3,251,708 11 The following table provides information with respect to shares of our common stock that were acquired by the Company during the fourth quarter of 2022: Monthly Period During the Quarter Ended December 31, 2022 Total Shares Purchased Average Price paid per Share Total Shares Purchased as Part of Publically Announced Plans Approximate Dollar Amount of Shares Yet To Be Purchased Under Plans Oct. 1, 2022 - Oct. 31, 2022 - $ - - - Nov. 1, 2022 – Nov. 30, 2022 67,192 $ 0.66 Dec. 1, 2022 – Dec. 31, 2022 17,857 $ 0.56 - - Total 85,049 $ 0.64 (a) All of these shares were acquired from associates to satisfy tax withholding or purchase price requirements upon the exercise of stock option grants.
Biggest changeThe following table provides information as of December 31, 2023 with respect to shares of our common stock that may be issued under equity compensation plans: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders 970,000 $ 0.12 3,351,708 Equity compensation plans not approved by security holders 1,700,000 0.60 None Total 2,670,000 $ 0.43 3,351,708 12 The following table provides information with respect to shares of our common stock that were acquired by the Company during the fourth quarter of 2023: Monthly Period During the Quarter Ended December 31, 2023 Total Shares Purchased Average Price paid per Share Total Shares Purchased as Part of Publicly Announced Plans Approximate Dollar Amount of Shares Yet To Be Purchased Under Plans Oct. 1, 2023 - Oct. 31, 2023 - $ - - - Nov. 1, 2023 – Nov. 30, 2023 17,790 $ 0.39 Dec. 1, 2023 – Dec. 31, 2023 - $ - - - Total 17,790 $ 0.39 (a) All of these shares were acquired from associates to satisfy tax withholding or purchase price requirements upon the exercise of stock option grants.
We did not pay dividends on our outstanding stock during the years ended December 31, 2022 and 2021. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future.
We did not pay dividends on our outstanding stock during the years ended December 31, 2023 and 2022. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future.
The following table sets forth the high and low bid prices for our common stock for each of the quarters of 2022 and 2021 as reported by the OTC Markets Group: 2022 2021 Low High Low High First Quarter $ 0.32 $ 0.52 $ 0.58 $ 0.91 Second Quarter 0.38 0.46 0.42 0.63 Third Quarter 0.41 0.71 0.38 0.63 Fourth Quarter 0.51 0.68 0.45 0.70 As of March 31, 2022, there were 86 stockholders of record of our common stock, although we believe there is a larger number of beneficial owners of our common stock.
The following table sets forth the high and low bid prices for our common stock for each of the quarters of 2023 and 2022 as reported by the OTC Markets Group: 2023 2022 Low High Low High First Quarter $ 0.42 $ 0.59 $ 0.32 $ 0.52 Second Quarter 0.25 0.50 0.38 0.46 Third Quarter 0.27 0.44 0.41 0.71 Fourth Quarter 0.25 0.45 0.51 0.68 As of March 28, 2024, there were 84 stockholders of record of our common stock, although we believe there is a larger number of beneficial owners of our common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeOur integration services decreased 22% or $1.6 million compared to 2020 on lower volumes from our OEM partner primarily attributable to the impact of supply-chain interruptions and other factors related to the COVID-19 pandemic. 19 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.
Biggest changeCost 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. 20 The cost of revenue as a percentage of revenue was 71% for the year ended December 31, 2022, compared to 77% for 2021.
Operating income (loss) Because of the higher absolute gross profits, even with the higher level of selling, general and administrative expenses, we were able to improve our operating profit by $1.7 million or 210% from 2021, and recorded operating income of $914,000 in 2022 compared to an operating loss of $831,000 that we recorded in 2021.
Operating Income Because of the higher absolute gross profits, even with the higher level of selling, general and administrative expenses, we were able to improve our operating profit by $1.7 million or 210% from 2021, and recorded operating income of $914,000 in 2022 compared to an operating loss of $831,000 that we recorded in 2021.
However, because of uncertainty regarding our ability to use these carry forwards and the potential limitations due to ownership changes, we have established a valuation allowance for the full amount of our net deferred tax assets.
However, because of uncertainty regarding our ability to use these carry forwards and the potential limitations due to ownership changes, we have established a valuation allowance for the full amount of our net deferred tax assets.
ASU 2019-15 provides final guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets at amortized cost (except held-to-maturity securities) using the fair value option. The effective date and transition methodology are same as in ASU 2016-13.
ASU 2019-15 provides final guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets at amortized cost (except held-to-maturity securities) using the fair value option. The effective date and transition methodology are the same as in ASU 2016-13.
The primary cause of the increase in gross profit margin percentage was the decrease in volume of our procurement and reseller business as a proportion of our total revenue where we generally earn much lower margins on product purchase/resell services than we do with our traditional maintenance and integration services.
The primary cause of the decrease in gross profit margin percentage was the increase in volume of our procurement business as a proportion of our total revenue, where we generally earn much lower margins on product purchase/resell services than we do with our traditional maintenance and integration services.
If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset. 16 Allowance for Doubtful Accounts We estimate an allowance for doubtful accounts based on factors related to the specific credit risk of each customer.
If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset. Allowance for Doubtful Accounts We estimate an allowance for doubtful accounts based on factors related to the specific credit risk of each customer.
Actual results may differ from forecasted results, which may have a material impact on the conclusions reached. We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.
Actual results may differ from forecasted results, which may have a material impact on the conclusions reached. 17 We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.
The increase in interest expense was due to the higher number of agent-type transactions that were factored in our procurement and reseller business compared to 2021. Interest expense in our procurement and reseller activities increased by $480,000 in 2022 due to the higher number of transactions and the impact of higher interest rates during 2022.
The increase in interest expense was due to the higher number of agent-type transactions that were factored in our procurement business compared to 2021. Interest expense in our procurement activities increased by $480,000 in 2022 due to the higher number of transactions and the impact of higher interest rates during 2022.
This resulted in an increase of approximately $14 million in our outstanding accounts payable at the end of 2022. During the first quarter of 2023 we paid those vendors and both our cash and accounts payable decreased by over $12 million.
This resulted in an increase of approximately $14 million in our outstanding accounts payable at the end of 2022. During the first quarter of 2023 we paid those vendors, and both our cash and accounts payable decreased by over $14 million.
Recently Issued Accounting Pronouncements In June 2016, FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets.
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.
We have been able to structure our procurement and reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities.
We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities.
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 can be no assurance as to the Company’s ability to scale its business operations on terms upon which additional financing might be available.
We may also require additional capital if we seek to acquire additional businesses to increase the scale of our operations, or if there is a sudden increase in the level of procurement services. There can be no assurance as to the Company’s ability to scale its business operations on terms upon which additional financing might be available.
With our receivable-financing program that we have with a third-party banking partner, all of these procurement and reseller transactions are financed via this program, and we incur interest cost on the gross value of these transactions. As volume increases in these procurement and reselling activities, our interest cost will increase.
With the receivable-financing program that we have with a third-party banking partner, all of these procurement transactions are financed via this program, and we incur interest costs on the gross value of these transactions. As the gross volume increases in these procurement activities, our interest cost will increase.
Changes in these and other items could still have a material impact upon our financial statements. 14 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.
Changes in these and other items could still have a material impact on our financial statements. 15 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.
Interest expense For the year ended December 31, 2022 we recorded interest expense, net of interest income, of $931,000. This compares to interest expense, net of interest income, of $401,000 for the year ended December 31, 2021.
Interest expense For the year ended December 31, 2022, we recorded interest expense, net of interest income, of $931,000. This compared to interest expense, net of interest income, of $401,000 for the year ended December 31, 2021.
Results of Operations Comparison of 2022 to 2021 Revenue Revenue consists of fees earned from the planning, design and project-management of mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services on these facilities. We also earn revenue from providing system configuration and integration services, including reseller services, to IT equipment vendors.
Results of Operations Comparison of 2023 to 2022 Revenue Revenue consists of fees earned from the planning, design and project management of mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services on these facilities. We also earn revenue from providing system configuration and integration services, including procurement services, to IT equipment vendors.
Income tax expense Due to a history of consolidated net operating losses, we have not recorded any income tax expenses, other than minimum or statutory costs. As of December 31, 2021, our accumulated net operating loss carry forward was $42.1 million. We anticipate that these loss carry-forwards may offset future taxable income that we may achieve and future tax liabilities.
Income tax expense Due to a history of consolidated net operating losses, we have not recorded any income tax expenses, other than minimum or statutory costs. As of December 31, 2023, our accumulated net operating loss carry-forward was $40 million. We anticipate that these loss carry-forwards may offset future taxable income that we may achieve and future tax liabilities.
We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize the assets in that business, and through adding additional services such as procurement and reseller services, to help drive volume through the facility.
We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize the assets in that business, and through adding additional services such as procurement services and data center moves, to help drive volume through the facility.
Accounts receivable from our reseller activities are typically due within 30-60 days of invoicing. 15 Judgments We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services.
Accounts receivable from our procurement activities are typically due within 30-60 days of invoicing. 16 Judgments We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services.
In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction.
In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customer by another party, and we have no control over the goods or services before they are transferred to the customer.
Our procurement and reseller revenues decreased by $1.3 million or 11% compared to 2021 because we completed more agent-type transactions in 2022 than we did in 2021, resulting in lower recorded revenue but higher profits from this line of business.
Our procurement revenues decreased by $1.4 million or 10% compared to 2021 because we completed more agent-type transactions in 2022 than we did in 2021, resulting in lower recorded revenue but higher profits from this line of business.
In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided to our customers by another party and we have no control of the goods before they are transferred to the customer.
We recognize our procurement services revenue upon completion of the procurement activity. In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided to our customers by another party and we have no control of the goods before they are transferred to the customer.
In March 2020, FASB issued Accounting Standards Update ASU No. 2020-04 , Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , (“ASU 2020-04”).
New Accounting Pronouncements Recently Adopted Accounting Guidance In March 2020, FASB issued Accounting Standards Update ASU No. 2020-04 , Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , (“ASU 2020-04”).
Investing activities: Cash used in investing activities was $0.5 million in 2022, primarily for the expansion and upgrading of our integration business and improvements to our facility.
Investing activities: Cash used in investing activities was $0.3 million in 2023, primarily for the upgrading of our integration business and improvements to our facility. This compares to cash used in investing activities of $0.5 million in 2022 for the expansion and upgrading of our integration facility to support our business.
As of December 31, 2022 and 2021, we had cash and cash equivalents of $20.4 million and $8.0 million, respectively. Significant uses of cash Operating activities: Cash provided by operating activities was $14.7 million for the year ended December 31, 2022, compared to cash used in operating activities of $10.5 million for the year ended December 31, 2021.
As of December 31, 2023 and 2022, we had cash and cash equivalents of $11.8 million and $20.4 million, respectively. Significant uses of cash Operating activities: Cash used in operating activities was $8.3 million for the year ended December 31, 2023, compared to cash provided by operating activities of $14.7 million for the year ended December 31, 2022.
This includes adapting our integration services to stay abreast of emerging technologies such as immersion computing, liquid-cooled computing, and edge-based technology, so that we can help our customers succeed in these new markets. 17 Our total revenue in 2022 was $30.6 million, a $3.2 million or 12% increase from our 2021 revenues of $27.4 million.
This includes adapting our integration services to stay abreast of emerging technologies such as immersion computing, liquid-cooled computing, and edge-based technology, so that we can help our customers succeed in these new markets. Our total revenue in 2023 was $54.4 million, a $23.8 million or 78% increase from our 2022 revenues of $30.6 million.
Because of the higher overall gross profits, even with higher selling, general and administrative expenses, we were able to improve our operating profit by $1.7 million or 210% from 2021, recording operating income of $914,000 in 2022 compared to an operating loss of $831,000 that we recorded in 2021. Our interest expense increased substantially compared to 2021.
Because of the higher overall gross profits, even with higher selling, general and administrative expenses, we were able to improve our operating profit by $0.8 million or 91% from 2022, recording operating income of $1,750,000 in 2023 compared to an operating profit of $914,000 that we recorded in 2022. Our interest expense increased by $0.7 million compared to 2022.
As of December 31, 2022, current deferred revenue of $2,080,000 consists of $1,787,000 representing our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and $293,000 relating to procurement and integration services where we have yet to complete our services for our customers, all of which are expected to be recognized within one year.
As of December 31, 2023, current deferred revenue of $3,370,000 consists of $2,404,000 representing our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and $966,000 relating to procurement and integration services where we have yet to complete our services for our customers as of December 31, 2023, all of which are expected to be recognized within one year.
Any of these factors may change our expectation of cash usage during 2023 and beyond or significantly affect our level of liquidity, which may require us to take other measures to reduce our operating costs in order to continue operating.
Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectation of cash usage during 2024 and beyond or significantly affect our level of liquidity, which may require us to take other measures to reduce our operating costs in order to continue operating.
This compares to net income of $0.1 million, or $0.001 per share we recorded for the year ended December 31, 2020. 20 LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity at December 31, 2022 are our cash and cash equivalents on hand, funds available under our bank credit facility and projected cash flows from operating activities.
This compares to a net loss of $1.3 million, or $(0.07) per share we recorded for the year ended December 31, 2021. 21 LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity at December 31, 2023 are our cash and cash equivalents on hand, funds available under our bank credit facility and projected cash flows from operating activities.
Net income (loss) After interest, other income and income taxes, we recorded a net loss of $73,000, or $(0.00) per share for the year ended December 31, 2022. This compares to a net loss of $1.3 million, or $(0.07) per share we recorded for the year ended December 31, 2021.
Net income (loss) After net interest and income taxes, we recorded net income of $74,000, or $0.00 per share for the year ended December 31, 2023. This compares to a net loss of $73,000, or $(0.00) per share we recorded for the year ended December 31, 2022.
In addition, we can face hiring challenges in internally staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead allows us to increase income, broaden our revenue base and have a favorable return on invested capital.
While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead allows us to increase income, broaden our revenue base and have a favorable return on invested capital.
The following table shows our revenues disaggregated by reportable segment and by product or service type (in $’000): Year ended December 31, 2022 2021 FACILITIES: Maintenance revenues $ 3,668 $ 3,540 Equipment sales 1,149 2,039 Deployment and other services 5,391 1,496 Total facilities revenues 10,208 7,075 SYSTEMS INTEGRATION: Integration services 7,186 5,668 Procurement and reseller services 13,243 14,667 Total systems integration revenues 20,429 20,335 TOTAL REVENUES $ 30,637 $ 27,410 Remaining Performance Obligations Remaining performance obligations include deferred revenues and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts.
The following table shows our revenues disaggregated by reportable segment and by product or service type (in $’000): Year ended December 31, 2023 2022 FACILITIES: Maintenance revenues $ 4,543 $ 3,668 Equipment sales 844 1,149 Deployment and other services 1,680 5,391 Total facilities revenues 7,067 10,208 SYSTEMS INTEGRATION: Integration services 8,817 7,186 Procurement services 38,515 13,243 Total systems integration revenues 47,332 20,429 TOTAL REVENUES $ 54,399 $ 30,637 Remaining Performance Obligations Remaining performance obligations include deferred revenues and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts.
Procurement and Reseller services We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our procurement and reseller services revenue upon completion of the procurement activity.
We record accounts receivable at the time of completion when our right to consideration becomes unconditional. Procurement services We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer.
Absent this business, the margins on our core integration and maintenance operations decreased from 44% in 2021 to 37% in 2022 despite higher revenues.
Profits from our procurement services increased by $1.7 million in 2022 compared to 2021. Absent this business, the margins on our core integration and maintenance operations decreased from 44% in 2021 to 37% in 2022 despite higher revenues.
Net income (loss) After interest, other income and income taxes, we recorded a net loss of $(1.3 million), or $(0.07) per share for the year ended December 31, 2021.
Net income (loss) After interest, other income and income taxes, we recorded a net loss of $73,000, or $(0.00) per share for the year ended December 31, 2022.
Typically, we do not receive advance payments for equipment sales, however if we do, we record the advance payment as deferred revenue. Normally we record accounts receivable at the time of shipment when our right to the consideration has become unconditional. Accounts receivable from our equipment sales are typically due within 30-45 days of invoicing.
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.
This was primarily due to an increase in costs, particularly labor costs, in our integration business that reflected higher wage inflation, higher levels of employee turnover that impacted efficiency, and development and other costs incurred in developing and introducing new types of integration service during 2022. 18 Our ability to maintain and to further improve gross profits will depend, in part, upon our ability to continue increasing sales of our higher-margin services including maintenance and integration services, improve our service margins by passing our higher operating costs on to our customers through increasing pricing, improving the operating efficiency of the integration business including utilization of our direct labor, and increasing the total revenues to a level that will allow us to increase the utilization of our integration and service operations.
Our ability to maintain and to further improve gross profits will depend, in part, upon our ability to continue increasing sales of our higher-margin services including maintenance and integration services, improve our service margins by passing our higher operating costs on to our customers through increasing pricing, improving the operating efficiency of the integration business including utilization of our direct labor, and increasing the total revenues to a level that will allow us to increase and improve the utilization of our integration and service operations.
We have been able to structure our procurement and reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities.
The increases in our inventory and receivables in 2023 compared to 2022 are also attributable to the timing of in-progress procurement projects. We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities.
We also received $41,000 in proceeds during 2022 from the exercise of employee stock options and used $134,000 during 2022 for the purchase of stock related to tax obligations around option exercises and the vesting of restricted shares.
In 2022 we used $134,000 for tax obligations around restricted stock vesting, and we received $41,000 in proceeds from the exercise of stock options by employees.
We are currently evaluating the adoption date and the impact of the adoption of this guidance on our consolidated financial statements and disclosures and do not expect it to have a material impact on our consolidated results of operation, cash flows, financial position or disclosure. 22 In May 2019, FASB issued Accounting Standards Update ASU No. 2019-15, Financial Instruments – Credit Losses (Topic 326) , (“ASU 2019-15”).
This guidance was adopted by us in the fourth quarter of 2023 and did not have a material impact on our consolidated results of operation, cash flows, financial position or disclosure. In May 2019, FASB issued Accounting Standards Update ASU No. 2019-15, Financial Instruments – Credit Losses (Topic 326) , (“ASU 2019-15”).
This increase was primarily due to the timing of cash flows connected with our procurement and reseller activities. These activities also resulted in a large increase in our accounts payable at the end of 2022 and drive large quarterly fluctuations in our accounts receivables, inventory and deferred revenues, depending on the timing of particular transactions.
These activities resulted in a large increase in our accounts payable at the end of 2022 which were paid in the first quarter of 2023. The procurement activities drive large quarterly fluctuations in our accounts receivables, inventory and deferred revenues, depending on the timing of particular transactions.
Management has evaluated the significance of these conditions in relation to its ability to meet its obligations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations including the funds from our customer financing programs, trade credit extended to us by our vendors, and borrowings under our bank credit facility.
Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations, including the funds from our customer financing program, and trade credit extended to us by our vendors, or under our revolving credit facilities with our bank.
This was exacerbated by the increase in interest rates during the second half of 2022. By way of comparison, we transacted approximately $28.3 million of such transactions in 2021. We ended 2022 with $20.4 million of cash on hand, an increase of $12.4 million from the balance at the end of 2021.
This increase in volume was exacerbated by the increase in interest rates during 2023. By comparison, we transacted approximately $72.8 million in such transactions in 2022. We ended 2023 with $11.8 million of cash on hand, a decrease of $8.6 million from the balance at the end of 2022.
Our reseller and procurement revenues were 43% of total revenue in 2022 compared to 54% of total revenues in 2021. We earn much lower margins on product purchase/resell services, unless we are acting as an agent in the transaction, than we do with our traditional maintenance and integration services.
We earn much lower margins on product purchase/resell services, unless we are acting as an agent in the transaction, than we do with our traditional maintenance and integration services. As the percentage of revenues derived from procurement services decreases, we would anticipate that cost of revenue as a percentage of sale will decrease.
An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness. As of December 31, 2022 and 2021, our allowance for doubtful accounts was $7,000.
An allowance for doubtful accounts is provided based on a periodic analysis of expected credit losses based on current estimates, which also includes a review of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customer’s creditworthiness.
The cost of revenue as a percentage of revenue was 71% for the year ended December 31, 2022, compared to 77% for 2021. This decrease in margin percentage from 2021 reflects the lower proportion of our total revenues that come from our procurement and reseller activities.
This decrease in margin percentage from 2021 reflects the lower proportion of our total revenues that come from our procurement activities. Our procurement revenues were 43% of total revenue in 2022 compared to 54% of total revenues in 2021.
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.
Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity. Gross Profit Our gross profit margin for the year ended December 31, 2023 was 20% compared to a gross profit margin of 29% for the year ended December 31, 2022.
As of December 31, 2022, the Company had an accumulated deficit of $66,385,000. In addition, the Company has a history of annual operating and net losses which have been due, in part, to the effects of COVID-19 and related supply chain constraints. These factors may be indicative of doubt about the Company’s ability to continue as a going concern.
As of December 31, 2023, the Company had an accumulated deficit of $66,311,000. Although we reported operating income in 2023 and 2022 and net income in 2023, we do have a history of annual operating and net losses which have been due, in part, to the effects of COVID-19 and subsequent supply chain constraints.
Selling, General and Administrative Expenses Selling, general and administrative expenses primarily consist of compensation and related expenses, including variable sales compensation, for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs.
Our gross profit margin is also likely to fluctuate based on the proportion of our total revenues that comes from our procurement activities. 19 Selling, General and Administrative Expenses Selling, general and administrative expenses primarily consist of compensation and related expenses, including variable sales and incentive compensation, for our executive, administrative, sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs.
As the percentage of revenues derived from procurement and reseller services decreases, we would anticipate that cost of revenue as a percentage of sale will decrease.
As the percentage of revenues derived from procurement services increases, we would anticipate that cost of revenue as a percentage of sales will also increase, and result in lower gross profit margins.
These procurement and reseller activities allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher margins on integration projects by broadening our revenue and customer base. 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.
These procurement activities allow us to develop relationships with new hardware, software, and professional service providers and allow us to generate higher margins on integration projects by broadening our revenue and customer base.
This was due to higher activity in our procurement and reseller business. During 2022 we transacted approximately $73 million of transactions in this business activity, although $60 million of this was for agent-type transactions.
This was due to a combination of higher interest rates during 2023 and higher levels of activity in our procurement business compared to the prior year. During 2023 we transacted approximately $123.1 million in transactions in this business activity, although $84.5 million of this was for agent-type transactions.
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.
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.
To the extent these customer delays continue, the pandemic worsens, or we have continued supply chain challenges, our business will continue to be negatively impacted. Our total revenue in 2022 was $30.6 million, a $3.2 million or 12% increase from our 2021 revenues of $27.4 million.
Comparison of 2022 to 2021 Revenue Our total revenue in 2022 was $30.6 million, a $3.2 million or 12% increase from our 2021 revenues of $27.4 million.
The increase in gross profit was greater than the increase in total revenues due in part to the impact of growth in the number of agent-type transactions in our procurement and reseller business in 2022.
The increase in gross profit was greater than the increase in total revenues due in part to the impact of growth in the number of agent-type transactions in our procurement business in 2022. Under these transactions we recognize as revenue the net margin we receive after paying the other party for goods or services that they deliver to the customer.
The primary reason for the increase in cash is due to the timing and financial impact of our procurement and reseller services on our financial statements. At the end of 2022 we were able to be paid for multiple large procurement projects but had yet to pay vendors for these same projects.
The volume of procurement activities was higher at the end of 2023 compared to the end of 2022, however, at the end of 2022 we were able to be paid for multiple large procurement projects but had yet to pay vendors for these same projects.
Thus, as procurement and reseller revenues as a percentage of total revenue increases, our cost of sales will increase and our gross profit margin will decrease. Since we earn higher profits when using our own labor services, we expect gross margins to improve when our labor service mix increases relative to the use of subcontracted or third-party labor.
Since we earn higher profits when using our own labor services, we expect gross margins to improve when our labor service mix increases relative to the use of subcontracted or third-party labor. Our direct labor costs are relatively fixed in the short-term, and the utilization of direct labor is critical to maximizing our profitability.
Equipment sales We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment to customers in the United States. We typically recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods.
As of December 31, 2023 and 2022, our allowance for doubtful accounts was $7,000. Equipment sales We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment to customers in the United States.
We were able to generate $14.7 million of cash flows from operations during 2022, and we were able to repay all the Company’s long-term notes payable during 2022 from our operating cash flows.
We were able to generate $14.7 million of cash flows from operations during 2022 but as the transactions completed, we used $8.3 million in operating activities during 2023.
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we still have a significant backlog of projects which have been impacted due to COVID-19 and the related supply chain constraints.
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have been able to grow our revenues and order backlog and seen an improvement in supply chain constraints. We believe that we will continue to be profitable on a quarterly and annual basis in 2024 and beyond.
We also offer our customers the ability to procure third-party hardware, software and services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer.
Our configuration and integration service businesses integrate these components to deliver a complete system to our customers. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software, or services that are to be provided to our customers by another party.
Our gross profits increased by $2.6 million or 41% compared to 2021, mainly due to the higher volumes of activity across all our business units, and our gross profit margin as a percentage of sales increased to 29% in 2022 from 23% in 2021.
The majority of this increase came from growth in our procurement and systems integration businesses, offset by a $3M decrease in our facilities revenues as the number of MDC deployments decreased compared to 2022. Our gross profits increased by $2 million or 23% compared to 2022, mainly due to the higher volumes of activity in our procurement and integration businesses.
As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern 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.
As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern.
Future uses of cash Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding estimated revenues and future costs and our ability to secure sources of funding when needed. Further, our estimates may change, and future events or developments may also affect our estimates.
We also received $367,000 in proceeds from the exercise of warrants by our former note holders, and we used $2.045 million to repay all of the company’s outstanding long-term debt upon its maturity in July 2022. 22 Future uses of cash Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding estimated revenues and future costs and our ability to secure sources of funding when needed.
This decrease in costs from 2020 reflects the lower proportion of our total revenues that come from our procurement and reseller business where we earn much lower margins on product purchase/resell services than we do with our traditional maintenance and integration services.
We earn much lower margins from our procurement services, unless we are acting as an agent in the transaction, than we do with our traditional maintenance and integration services.
Almost all of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers, thus our revenues reflect only the services we perform, and the consigned components are not reflected in our balance sheet.
The loss of this customer could have a material negative effect on our results. Our operational focus is to ensure this doesn’t happen. Most of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers.
The cost of revenue as a percentage of revenue was 77% for the year ended December 31, 2021 compared to 85% for 2020.
The cost of revenue as a percentage of revenue was 80% for the year ended December 31, 2023, compared to 71% for 2022. This increase is primarily due to the higher proportion of our total revenue that is from procurement services in 2023.
Our selling, general and administrative expenses of $7.7 million were 15% higher than the $6.7 million we recorded in selling, general and administrative expenses in 2021.
Absent this business, the margins on our core integration and maintenance operations decreased to 36% in 2023 from 37% in 2022 due to the lower volume of maintenance business during 2023. Our selling, general and administrative expenses of $8.9 million were 16% higher than the $7.7 million we recorded in selling, general and administrative expenses in 2022.
We also received $45,000 in proceeds in 2021 from the exercise of employee stock options, and we used $197,000 in 2021 for the purchase of stock related to tax obligations from option exercises and the vesting of restricted shares by our employees.
Finance activities: Cash used in financing activities was $40,000 in 2023 compared to cash used in financing activities of $1.8 million during 2022. The cash used in financing activities during 2023 was for the purchase of stock related to tax obligations around vesting of restricted stock by our employees.
For the year ended December 31, 2021, our selling, general and administrative expenses of $6.7 million decreased by $18,000, compared to 2020. Operating Income Because of the lower overall gross profits, with consistent selling, general and administrative expenses, we incurred a higher operating loss of $831,000 in 2021.
Operating income Because of the higher absolute gross profits, even with the higher level of selling, general and administrative expenses, we were able to improve our operating profit by $0.8 million or 91% from 2022 and record an operating income of $1,750,000 in 2023 compared to operating income of $914,000 that we recorded in 2022.
Under these transactions we recognize as revenue the net margin we receive after paying the other party for goods or services that they deliver to the customer. Profits from our procurement and reseller services increased by $1.7 million in 2022 compared to 2021.
In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer.
Removed
(“TSS”, the “Company”, “we”, “us” or “our”) provides a range of comprehensive services to enable the planning, design, deployment, maintenance, and refurbishment of end-user and enterprise systems, including the mission-critical facilities they are housed in.
Added
(“TSS”, the “Company”, “we”, “us” or “our”) provides a range of integration and technology services that enable enterprises and users to successfully implement, operate and maintain their Information Technology systems. As a provider of technology services businesses built on a platform of experienced program management, we have expertise in delivering complex, end-to-end IT technology solutions cost-effectively.
Removed
We provide a single source solution for enabling technologies in data centers, operation 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, system installations, facilities management, and IT procurement services.
Added
These IT solutions can be deployed in a variety of physical settings such as data centers, co-location facilities, server rooms, modular or edge-based solutions, security operations, and communications facilities.
Removed
Our headquarters and our integration facility are located in Round Rock, Texas Our business is concentrated on the U.S. 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.
Added
Our services include rack and systems integration, configuration services, data center and modular data center facility management integrations, deployment and maintenance services, strategic procurement services, project management and technology consulting, design and engineering services.
Removed
These underlying macroeconomic trends are driving demand for more information technology equipment and more efficient data center design and operation, resulting in continued overall 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.
Added
Our headquarters and our systems integration and configuration services facility are located in Round Rock, Texas We support a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDC), in colocation facilities or at the edge of the network.

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