TSS, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in millions of dollars, except per-share data and percentages, unless stated otherwise. TSS provides data-center and enterprise technology services, including facilities work, systems integration, and IT reseller services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $20.763 | $4.176 | $37.814 | $12.375 |
| Gross profit / margin | $2.773 / 13% | $1.497 / 36% | $5.141 / 14% | $4.585 / 37% |
| Operating income (loss) | $0.966 | $(0.012) | $(0.260) | $0.040 |
| Net income (loss) | $0.852 | $(0.095) | $(0.558) | $(0.220) |
| Diluted earnings (loss) per share | $0.04 | $(0.01) | $(0.03) | $(0.01) |
- Q3 revenue rose 397% year over year, mainly due to $15.849 million of reseller-services revenue and 71% growth in core integration services. Nine-month revenue increased 206%, primarily reflecting $25.639 million of reseller services.
- Facilities revenue declined 7% in Q3 and 20% for the nine-month period, with customer project deferrals and pandemic-related limits on site access cited as principal causes.
- Reseller sales expanded revenue but reduced gross margin because resale activities carry lower margins. Management also cited higher integration-facility costs associated with COVID-19 measures.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $9.455 million at September 30, 2020, versus $8.678 million at December 31, 2019. Total assets were $14.545 million; stockholders’ equity was $2.380 million.
- For the first nine months, operating cash flow was $0.438 million, investing cash flow was $(0.381) million, and financing cash flow was $0.720 million. Capital expenditures were $0.381 million.
- Current assets were $11.498 million and current liabilities $8.941 million. The company reported $3.076 million of long-term borrowings and PPP-loan liabilities of approximately $0.893 million, including accrued interest. Operating lease liabilities totaled $1.125 million.
- The $1.5 million asset-based revolving credit facility had no borrowings at quarter-end, but only about $0.122 million of borrowing-base availability was indicated. TSS was not in compliance with financial covenants due to year-to-date losses and was not eligible to borrow under the facility. The facility matured December 31, 2020.
- Operating cash flow benefited from working-capital movements, including collections and deferred revenue, and management said reseller activities can cause quarterly cash-flow fluctuations. TSS factored approximately $23.6 million of receivables in Q3 and $42.3 million in the first nine months under a non-recourse arrangement.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management said it expected adequate capital for at least the next 12 months if business-plan cash-flow projections were achieved, while noting that weaker revenue, higher costs, working-capital requirements, or pandemic effects could impair liquidity.
- COVID-19 disrupted customer-site access and project timing in facilities, and supply-chain constraints delayed integration and reseller work. Management said the duration and future effects remained uncertain.
- A single U.S.-based IT OEM represented 99% of Q3 revenue, 97% of nine-month revenue, and 77% of trade receivables at quarter-end. The filing warns that loss of, or reduced orders from, this customer could materially harm results.
- TSS received an approximately $0.890 million Paycheck Protection Program loan and applied for full forgiveness in August 2020; forgiveness had not been determined as of the filing. The loan bears 1% interest and is due in 2022 under its stated terms.
- Long-term related-party notes payable to entities affiliated with the board chairman carry a 12% annual rate, partly payable in kind, and mature in July 2022. The chairman is connected to the lenders.
- Management reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2020. The filing provides no specific forward-looking operating targets.
Key facts for investors to verify
- Whether the sharp increase in reseller revenue can be sustained profitably, given its lower margins and working-capital demands.
- The status of PPP-loan forgiveness and the company’s refinancing or repayment arrangements for the revolving facility, which was due to mature after quarter-end.
- Customer concentration and the impact of continued OEM supply-chain disruptions or COVID-related access restrictions.
- The filing contains an apparent inconsistency: the balance sheet reports accumulated deficit of $(65.652) million, while the statement of changes in equity shows $(66.652) million at September 30, 2020. The latter also does not reconcile to reported total equity; verify against the filed financial statements.