TSS, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. TSS provides data-center facilities services and systems integration, including IT procurement and reseller services. All revenue is generated in the United States.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $5.192 million | $5.170 million |
| Gross profit / margin | $1.666 million / 32% | $1.305 million / 25% |
| Operating loss | $173,000 | $607,000 |
| Net loss | $308,000 | $699,000 |
| Loss per share, basic and diluted | $0.02 | $0.04 |
| Cash provided by (used in) operating activities | $4.880 million | ($10.028 million) |
Revenue was nearly flat year over year. Facilities revenue rose 32% to $2.079 million, driven by more modular data-center deployments; Systems Integration revenue fell 13% to $3.113 million. Reseller and procurement revenue declined about 22% (approximately $0.5 million), while deployment and other facilities revenue increased. Gross margin improved mainly because lower-margin reseller activity represented a smaller share of revenue. Core integration and maintenance margin, excluding reseller business, was 40%, compared with 41% a year earlier.
Operating expenses were $1.839 million, down from $1.912 million. Net interest expense increased to $124,000 from $85,000. Management attributed the operating cash-flow improvement mainly to project timing: customer payments and increased accounts payable related to reseller projects. Accounts payable and accrued expenses rose to $10.999 million from $7.016 million during the quarter.
Financial position and liquidity
At March 31, 2022, cash was $12.841 million, total assets were $23.236 million, and stockholders’ equity was $1.998 million. Current liabilities exceeded current assets by $499,000. Notes payable of $2.013 million, including accrued in-kind interest and net of discount, were classified as current and mature in July 2022. The notes bear 12% interest and are owed to entities affiliated with the Board chair; they are secured by substantially all company assets. Operating lease liabilities totaled $5.390 million.
Management disclosed recurring losses, an accumulated deficit of $66.620 million, negative working capital, and the July debt maturity as conditions that initially raised substantial doubt about going concern. Management concluded that substantial doubt was alleviated based on cash resources, expected operating cash flows, vendor trade credit, and a backlog it expects to fulfill as supply availability improves. This conclusion depends on forecasts and supplier delivery expectations; management said its plan supports obligations for at least the next 12 months if projections are met.
After quarter-end, TSS entered into a revolving asset-based credit facility with a maximum of $1.5 million, subject to an 80% eligible-receivables borrowing base. It matures May 5, 2023, carries a prime-based rate with a 3.5% floor, and requires minimum liquidity of $1.5 million. Receivables secure the facility.
Outlook, risks, and unusual items
- Management expected to fulfill a large portion of delayed backlog during the remainder of 2022, citing recovering deployments and anticipated supply-chain improvement. Vendors expected supply constraints to continue until later in the year. The filing provides no quantified revenue or earnings guidance.
- COVID-19-related site access restrictions and supply-chain disruptions delayed projects and constrained both facilities and integration activity. Further disruption, lower-than-projected revenue, higher costs, or greater working-capital needs could pressure liquidity.
- A single U.S.-based IT OEM represented 94% of Q1 revenue, versus 93% in Q1 2021, and 62% of trade receivables at quarter-end. The filing warns that losing or materially reducing business with this customer could significantly harm results.
- The company uses non-recourse factoring for certain OEM receivables. It factored approximately $15.3 million in Q1 2022, compared with $7.3 million a year earlier, and incurred $91,000 in related fees recorded as interest expense.
- A litigation settlement was agreed in January 2022 for $500,000; $450,000 was covered by insurance. The settlement was paid in February. The company reported no other material pending litigation.
Most important facts for investors to verify
- Whether backlog converts to revenue and cash as expected, given ongoing supply constraints and project timing.
- Liquidity, the July 2022 maturity of related-party notes, and compliance with the new credit facility’s borrowing-base and minimum-liquidity requirements.
- Dependence on the dominant OEM customer and the continued availability and cost of receivables factoring and vendor trade credit.
- Whether improving gross margins and reduced losses persist as the revenue mix between facilities, integration, and reseller services changes.