TSS, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. TSS provides data-center and mission-critical facilities services, systems integration, and IT reseller services. All revenue was generated in the United States. Unless otherwise noted, amounts below are in millions.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $6.454 | $3.539 | $17.051 | $8.199 |
| Gross profit / margin | $0.767 / 12% | $1.452 / 41% | $2.368 / 14% | $3.088 / 38% |
| Operating income (loss) | $(0.949) | $0.002 | $(1.226) | $0.052 |
| Net income (loss) | $(1.042) | $(0.094) | $(1.410) | $(0.125) |
| Loss per share | $(0.06) | $(0.01) | $(0.08) | $(0.01) |
- Revenue mix and change: Q2 Systems Integration revenue was $4.896 million, including $3.017 million of reseller services; Facilities revenue was $1.558 million. For the first half, reseller services contributed $9.790 million. Revenue growth was driven by the reseller business, which began in 2019; Facilities revenue declined 24% in Q2 and 26% in the first half.
- Profitability: Cost of revenue rose to 88% of revenue in Q2 from 59% a year earlier, and to 86% for the first half from 62%. Management attributed lower margins to the low-margin reseller mix and higher integration-facility costs related to COVID-19. First-half gross profit fell $0.720 million despite the increase in revenue.
- Cash flow: First-half operating cash use was $1.903 million, versus $0.155 million provided in 2019; investing cash use was $0.363 million, versus $0.164 million. Financing provided $0.722 million, including the PPP loan. Cash declined from $8.678 million at year-end 2019 to $7.134 million at June 30, 2020.
- Balance sheet and debt: Total assets were $14.776 million, total liabilities $13.283 million, and stockholders’ equity $1.493 million. The company reported $2.130 million of long-term borrowings and a $0.890 million PPP note plus $0.002 million accrued interest. The long-term borrowings are principally notes due July 2022 bearing 12% interest, including debt owed to entities affiliated with the board chairman. Operating lease liabilities totaled $1.290 million.
- Liquidity: The $1.5 million asset-based credit facility had no outstanding balance, but borrowing availability was approximately $0.140 million and TSS was ineligible to borrow at quarter-end because it did not meet financial covenants. The company disclosed a $0.500 million minimum liquidity requirement and a June amendment allowing an alternative interest-coverage test with specified unrestricted-liquidity requirements.
Material developments, outlook, and risks
- COVID-19 restrictions and customer site-access limits delayed Facilities projects. Supply-chain interruptions, including shortages of components sourced through the largest customer, delayed Systems Integration and reseller work. TSS also reported higher facility safety and operating costs.
- The $0.890 million PPP loan was received in April 2020, bears 1% interest, and matures in April 2022. TSS intended to apply for forgiveness, but stated forgiveness of any amount was not assured.
- Management expected available resources to support operations for at least 12 months if its cash-flow projections were met. It cautioned that weaker revenue, higher costs, working-capital needs, reseller growth, or prolonged pandemic effects could impair liquidity; additional capital might be needed and might not be available on acceptable terms. No numerical earnings or revenue guidance was provided.
- Customer concentration is significant: one U.S.-based IT OEM accounted for 97% of Q2 revenue and 96% of first-half revenue, and 72% of receivables at June 30. Management warned that losing or materially reducing business with this customer would significantly affect results.
- Management reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting during the quarter. TSS reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether reseller revenue can be completed and converted to cash without further margin pressure or working-capital strain.
- Whether the company can regain compliance with credit-facility covenants and what liquidity will be available when the facility matures in December 2020.
- The amount, if any, of PPP loan forgiveness ultimately approved and the resulting repayment obligations.
- How COVID-19-related site restrictions, customer project delays, and supply-chain disruptions affect future revenue, costs, and cash flow.
- The continuing dependence on the major OEM customer and the terms and economics of related-party debt.