TSS, Inc.: Form 10-Q for the period ended Sep 30, 2022

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2021 included in our 2021 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2021 Annual Report on Form 10-K for a discussion of items that may affect our future results.

Overview

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

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

Almost all of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers, thus our revenue reflects only the services we perform, and the consigned components are not reflected in our balance sheet. We also offer our customers the ability to procure third-party hardware, software and services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction. These procurement and reseller services allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher profits on integration projects by broadening our revenue and customer base.

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

The COVID-19 pandemic had both an immediate and an ongoing impact on our operations in both our facilities segment and our systems integration segment since it began. Travel restrictions and other customer-actions that restricted physical access to customer sites negatively impacted our facilities segment because we were unable to access customer locations to provide our services. We also experienced supply-chain disruptions beginning in the second half of 2021 until early 2022 that delayed the delivery of equipment needed for both integration and for deployments, further delaying customer projects. Overall, these travel restrictions and supply chain challenges directly impacted our operating results though the first quarter of 2022 for our facilities segment, and up to and including our most recent quarter for our systems integration business. Additionally, as our customers deferred or cancelled the deployment of new modular data centers (MDCs) in 2021 they instead maintained and updated their existing MDCs. As supply chain issues continued to improve in 2022, we have been able to source needed equipment and complete MDC deployments. Revenues from MDC deployments have increased during 2022 by $4.2 million or 433% compared to the same period in 2021, helping drive the increase in our facilities revenues.

Our systems integration business has also been negatively impacted due to logistical and supply-chain issues that have continued to affect component supply to us and negatively impact our revenue through the pandemic. Safety and other measures that we had to implement in our systems integration facility so that we could continue to operate safely despite the pandemic materially increased the cost of operating and providing our integration services, particularly at the onset of the pandemic. As time has passed and with knowledge gained, we have been able to significantly reduce these incremental operating costs. The supply-chain disruptions have prevented our customers from providing product to us for use in our integration business, preventing us from providing our services, and negatively impacting our revenue. We continued to experience delays in obtaining needed components during the most recent quarter, causing us to defer integration projects and revenues as a result. Despite these ongoing challenges, overall there has been an improvement in supply chain issues during 2022 that has helped our integration services revenues grow by 22% year to date in 2022 same compared to the same period in 2021.

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

RESULTS OF OPERATIONS

Revenue

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

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

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

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

Revenues of $8.1 million for the three-month period ended September 30, 2022 increased by $3.5 million or 76% compared to the third quarter of 2021. The increase was across both operating segments, and revenues from our facilities segment increased by $0.8 million or 34% compared to the third quarter of 2021 driven by a $1.6 million increase in revenues from deployment of MDCs as supply chain constraints eased and we were able to deliver against our backlog of deployment projects, offset by a decrease in MDC upgrade/refurbishment revenues of $0.7 million. Our systems integrations segment saw revenues of $4.8 million, an increase of $2.7 million, or 125% compared to the third quarter of 2021 as an improvement in supply chain constraints enabled our customers to procure parts needed to complete integration projects, and allowed us to increase revenues, in our procurement and reselling activities compared to the third quarter of 2021.

On a year-to-date basis, for the nine-month period ended September 30, 2022, our total revenues of $19.7 million have increased by $6.9 million or 54% compared to the first nine months of 2021 when we recorded revenue of $12.8 million. This was driven by $3.3 million or 59% growth in our facilities segment attributable to a higher level of MDC deployments, and $3.5 million or 49% growth in our systems integration segment, driven by higher integration business from our OEM partner as global supply-chain disruptions have started to dissipate and from an increase in our procurement and reseller activities.

Although we have seen an improvement in the current quarter in the supply chain constraints that we have been experiencing that prevent our partners and customers from delivering all of the products needed for us to complete and perform integration services, there are still ongoing supply issues that persist. These supply chain disruptions cause delays in the timing of systems integration revenue for us as we await delivery of required components, and our vendors and partners expect these supply-chain issues to continue for at least the next several quarters.

Our reseller and procurement revenues involve us procuring third-party hardware, software and services on our customers’ behalf that are then typically used in our integrated services as we integrate those components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer. During the third quarter of 2022 we had more agent-type transactions allowing our total revenues from reseller and procurement services to increase by $2.4 million or 347% compared to the third quarter of 2021, and allowing the gross profits from this business to increase by approximately $0.6 million compared to the third quarter of 2021. For the nine-month period ended September 30, 2021 our total revenue from reseller and procurement activity of $5.6 million had increased by $2.6 million or 88% compared to the same period in 2021, and allowing the gross profits from this business to increase by approximately $0.9 million.

Cost of Revenue

Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expense, equipment and other costs associated with our test and integration facilities, excluding depreciation of our manufacturing property and equipment, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. The cost of revenue as a percentage of revenue was 66% for the three-month period ended September 30, 2022 compared to 58% for the third quarter of 2021. This increase from the third quarter of 2021 reflects the increased activity in our facilities segment as the number of MDC deployment projects increased compared to 2021 and from higher costs including labor costs, in our integration business compared to the prior year. We earn much lower margins on product purchase/resell services, unless we are acting as an agent in the transaction, than we do with our traditional integration and maintenance services. As the percentage of our total revenue derived from reseller services increases, we would anticipate that cost of revenue as a percentage of sales will increase. Absent the reseller business, the profit margin from our core integration and maintenance services was 42% in the third quarter of 2022 compared to 44% in the third quarter of 2021.

For the nine-month period ended September 30, 2022, our cost of revenue as a percentage of revenue was 64%. This compares to 64% for the comparable period of 2021.

The level of expected revenue from our reseller services has and will continue to fluctuate significantly on a quarterly basis. As a result, our cost of revenue as a percentage of total revenue will also fluctuate significantly. Cost of revenue for reseller services is higher than cost of revenue for our integration and maintenance services.

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

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

Gross Profit

Our gross profit margin for the three-month period ended September 30, 2022 was 34% compared to a gross profit margin of 42% in the third quarter of 2021. This decrease in margin as a percentage of revenues compared to the third quarter of 2021 was primarily attributable to an increase in costs, particularly labor costs, in our integration business and from an increase in the volume of reseller and procurement activities. Our reseller and procurement revenues were 38% of total revenues in the third quarter of 2022 compared to 15% of our total revenues in the third quarter of 2021. We earn much lower margins on product purchase/resell services, unless we are acting as an agent in the transaction, than what we earn from our core integration and maintenance activities. As reseller and procurement revenues grow as a percentage of our total revenues, we would expect our overall gross profit margin to decrease. The growth in our total revenues compared to 2021 allowed us to increase our overall gross profit by $0.8 million or 44%, to $2.8 million in the third quarter of 2022 compared to $1.9 million gross profit in the third quarter of 2021. The 54% growth in total revenue in 2022 has allowed us to increase our gross profit for the nine-month period ended September 30, 2022 by $2.4 million or by 51% compared to the first nine months of 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily consist of compensation and related expenses, including variable sales compensation, for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs. For the three-month period ended September 30, 2022, our selling, general and administrative expenses increased by $266,000 or 17% compared to the third quarter of 2021 primarily due to higher compensation costs including incentive-based compensation due to our improved operating results, and from higher professional fees. For the nine-month period ended September 30, 2022, our selling, general and administrative expenses increased by $156,000 or 3% compared to the first nine months of 2021, primarily due to higher compensation costs.

Income (Loss) from Operations

For the three-month period ended September 30, 2022, we recorded operating income of $871,000. This compares to an operating income of $228,000 that we had in the third quarter of 2021. For the nine-month period ended September 30, 2022, we recorded operating income of $1,637,000, compared to an operating loss of $730,000 that we recorded in the first nine months of 2021.

Interest expense

For the three-month period ended September 30, 2022, we recorded interest expense, net of interest income of $255,000. This compares to $83,000 in the three-month period ended September 30, 2021. 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. For the nine-month period ended September 30, 2022, we recorded interest expense, net of interest income, of $537,000, compared to $271,000 in the same period of 2021. This increase was due to $314,000 of interest expense attributable to agent-type reseller transactions in 2022 offset by a reduction in interest expense due to the maturity and repayment of long-term debt in 2022.

Net Income (Loss)

After net interest expense and income taxes we recorded net income of $605,000 or $0.03 per share for the three-month period ended September 30, 2022. This compares to net income of $123,000 or $0.01 per share for the three-month period ended September 30, 2021. For the nine-month period ended September 30, 2022 we recorded net income of $1,068,000 or $0.05 per share. This compares to a net loss of $(1,032,000) or $(0.06) per share that we recorded in the comparable period of 2021.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity at September 30, 2022 are our cash and cash equivalents on hand, funds available to us under our revolving line of credit, vendor trade-credit and projected cash flows from operating activities.

As of September 30, 2022, the Company had an accumulated deficit of $65.2 million. We have recorded operating and net income in our two most recent quarter but have a history of annual operating losses over recent years which have been due, in part, to the effects of COVID-19 and related supply chain constraints. These factors may be indicative of doubt regarding the Company’s ability to continue as a going concern. Management has evaluated the significance of these conditions in relation to its ability to meet its obligations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations, including the funds from our customer financing programs, funds available under our bank revolving credit facility and trade credit extended to us by our vendors. If our future results do not meet expectations, management believes that we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that would take further steps such as the issuance of new equity or debt. We may also require additional capital if we seek to acquire additional businesses as a way to increase the scale of our operations, of there is a sudden increase in the level of reseller and procurement services. There can be no assurance as to the Company’s ability to scale its business operations or terms upon which additional financing may be available.

Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have a significant backlog of projects which have been delayed due to COVID-19 and the related supply-chain constraints. During the second and third quarters of 2022 we were able to achieve operating and net profits as we saw improvement in delivery of products and components that allowed us to fulfil a large portion of our existing backlog. We anticipate that this will continue into the next quarter based on anticipated delivery of products and components as indicated by suppliers and vendors and that we will again be profitable in the fourth quarter and for the year ending December 31, 2022 and that we will be profitable in 2023. We were also able to repay all of the Company’s long-term debt during the third quarter of 2022 from existing liquidity and we now have no long-term debt apart from lease obligations. 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 and meet our debt obligations for at least the next twelve months. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, there are potential risks, including that our revenues may not meet our projections, our costs may exceed our estimates, or our working capital needs may be greater than anticipated. Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectation of cash usage in 2022 and beyond or significantly affect our level of liquidity, which may limit our opportunities to grow our business.

At September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $9.6 million and $8.0 million, respectively.

Significant Uses of Cash

Operating Activities:

Cash provided by operating activities was $3.6 million for the nine-month period ended September 30, 2022 compared to cash used in operating activities of $6.5 million for the nine-month period ended September 30, 2021. This change was primarily attributable to the timing and financial impacts of our procurement and reseller services. At the end of calendar year 2020 we were able to be paid by our customers for a number of large procurement projects, but we had yet to pay our vendors for these same projects. This drove an increase of $10 million in cash and accounts payable at the end of 2020. During the first quarter of 2021 we paid those vendors and both our cash balances and our accounts payable decreased by over $10 million, resulting in the decrease in our cash on hand compared to December 31, 2020 and resultant use of cash in operations during 2021. We have been able to structure our procurement and reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities. However due to timing it is possible to see fluctuations on a quarterly basis for reseller contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit available to us to continue financing our reseller activities as we grow this business during 2022 and beyond. Otherwise, the change in cash provided by operating activities was primarily due to the improvement in our operating and net income in 2022 compared to the first nine months of 2021.

Investing Activities:

Cash used in investing activities was $213,000 in the nine-month period ended September 30, 2022 for the purchase of property and equipment for our integration facility, compared to cash used in the same period of 2021 of $60,000 for purchases of property and equipment.

Financing Activities:

Cash used in financing activities was $1,727,000 in the nine-month period ended September 30, 2022 compared to cash used in financing activities of $488,000 in the nine-month period ended September 30, 2021. During the third quarter of 2022 we repaid outstanding interest and principle on our notes payable of $2,045,000, and used $80,000 in the purchase of stock related to tax obligations around vesting of restricted stock by our employees. We received $31,000 from the exercise of employee stock options, and we also received $367,000 in proceeds from the exercise of warrants that had been issued in connection with our notes payable. In 2021 we received $20,000 from the exercise of employee stock options and $156,000 was used in 2021 for the purchase of stock related to tax obligations around the option exercises. We used $352,000 to retire a portion of our long-term debt in June 2021 following incentives from the lenders to repay this debt prior to maturity.

Future Uses of Cash

Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues may not meet our expectations, or our costs may exceed our estimates. Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectations of cash usage during 2022 or beyond or significantly affect our level of liquidity, which may require us to take other measures to reduce our operating costs in order to continue operating. Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially impact our financial results depending on the level of cost reductions taken.

Our primary liquidity and capital requirements are to fund working capital from current operations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations including the funds from our customer financing programs. We believe that if future results do not meet expectations, we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that we could take further steps such as the issuance of new equity or debt. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses as a way to increase the scale of our operations.

Off-Balance Sheet Arrangements

As of September 30, 2022 and December 31, 2021, we had no off -balance sheet arrangements.

Critical Accounting Policies and Pronouncements

There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2021 on our consolidated financial statements and disclosures. See also Item 1. Financial Statements Note 1 – Significant Accounting Policies regarding Recent Accounting Pronouncements.

Our management performed an evaluation under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2022. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective such that information relating to the Company required to be disclosed in the Company’s SEC reports (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding financial disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting for the three-month period ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act of 1934, as amended.

Supply chain challenges have and will likely negatively affect our systems 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 delaying completion of services for our customers.

Since the COVID 19 pandemic began in 2020, due to its impact on global production and distribution we have experienced ongoing shortages of components needed to complete integration and procurement services, delaying our ability to recognize revenue for these projects and negatively impacting our profitability. This has also resulted in us having to hold onto greater quantities of customer inventory for longer time periods while we wait for the missing components to be delivered. Due to our fixed storage capacity, holding customer-owned inventory for longer periods has negatively impacted our ability to perform other services, and added cost and risk, including custodial risk, into our systems integration business. The supply chain disruptions have also directly impacted vendors and other third parties from whom we procure goods and services for our reseller and procurement business, causing delays in completing procurement services for our customers. This has the potential to materially harm the Company’s operating results by delaying recognition of revenue. This can also harm the Company’s liquidity 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.

Changes in labor market conditions are causing increases in our labor costs, and, if we are unable to adequately recover these costs from our customers, our business will be negatively impacted.

At times we experience higher levels of employee attrition, increasing compensation costs and resulting in more intense competition for talent. We believe that our future success will be dependent upon retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and properly managing the transition of key roles when they occur. As a small company we are particularly susceptible to negative impacts if critical and experienced personnel leave. Hiring and retaining qualified executives and other employees is therefore critical to our business. During 2022 we have experienced increased wage pressure and challenges in hiring people in the Austin, Texas market and had to pay higher costs to attract new employees and retain our existing employees. If our total compensation programs, employment benefits, and overall workplace culture are not viewed as competitive and inclusive, our ability to attract, retain and motivate employees could be compromised. To the extent we experience significant attrition or the loss of critical employees and are unable to 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 that we are unable to promptly pass higher labor costs on to our customers, our business will be further negatively impacted. Our inability to attract, retain and motivate employees or manage succession of key roles may inhibit or ability to maintain or expand our business operations.

We are partially through the implementation of a new enterprise resource IT system and have yet to deploy this new system across our business units. Any challenges, delays, difficulties or errors during the implementation of this new system may negatively impact our business operation and harm our operating results.

We rely on computerized inventory and management systems to coordinate and manage the activities in our systems integration business, as well as to communicate inventory and shipment information to our vendors and customers. Our ability to process incoming deliveries, track inventory through the integration process, and process shipments in a timely manner are essential to the operations of our integration business. As we introduce a new system to perform these 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 systems integration business and harm our operating results. This new system is not the system of record for financial reporting and disclosure of information for the nine-month period ended September 30, 2022. The Company will begin to use this new enterprise system as its system of record on October 1, 2022.