TSS, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial-statement figures are presented in millions unless stated otherwise.
Business context
TSS provides data-center and mission-critical facilities services, systems integration, and IT procurement/reseller services. It reports two segments: Facilities and Systems Integration. Nearly all systems-integration components are customer- or OEM-consigned; TSS’s reported revenue reflects its services on those components. All revenue is from the United States.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $8.077 | $4.587 | $19.690 | $12.825 |
| Gross profit | $2.765 | $1.921 | $7.043 | $4.678 |
| Gross margin | 34% | 42% | 36% | 36% |
| Operating income (loss) | $0.871 | $0.228 | $1.637 | $(0.730) |
| Net income (loss) | $0.605 | $0.123 | $1.068 | $(1.032) |
| Diluted earnings (loss) per share | $0.03 | $0.01 | $0.05 | $(0.06) |
- Q3 revenue increased 76% year over year; nine-month revenue rose 54%. Facilities revenue was $3.309 million in Q3 and $8.986 million year to date. Systems Integration revenue was $4.768 million and $10.704 million, respectively.
- Q3 gross margin declined to 34% from 42%, chiefly due to a larger share of lower-margin reseller/procurement revenue and higher integration labor costs. Reseller/procurement revenue was 38% of Q3 revenue versus 15% a year earlier. Management reported core integration and maintenance margin, excluding reseller activity, of 42% versus 44%.
- Q3 operating income improved to $0.871 million. Facilities generated $1.036 million of segment operating income; Systems Integration reported a $0.165 million segment operating loss. Nine-month operating results turned positive from a loss in 2021.
- Net interest expense was $0.255 million in Q3 and $0.537 million for nine months, up from $0.083 million and $0.271 million, respectively. The increase included financing fees on factored reseller receivables.
Cash, liquidity and debt
- Cash was $9.605 million at September 30, 2022, compared with $7.992 million at December 31, 2021. Current assets were $17.779 million and current liabilities $16.514 million, leaving working capital of approximately $1.265 million.
- Operating cash flow was positive $3.553 million for the first nine months, versus cash used of $6.477 million in 2021. Investing used $0.213 million; financing used $1.727 million, including $2.045 million of debt repayment.
- All long-term borrowings were repaid in July 2022. The company had no bank-facility borrowings at quarter-end; lease liabilities totaled $5.090 million. A secured revolving facility has a $1.5 million maximum, but the borrowing base limited eligible availability to approximately $0.163 million at September 30. It requires minimum liquidity of $1.5 million and matures May 5, 2023.
- Accounts receivable factoring is used to finance working capital. TSS factored approximately $27.4 million of receivables in Q3 and $53 million for the first nine months, paying fees of approximately $0.237 million and $0.393 million, respectively.
Changes, outlook and risks
- Management attributed the improved results to easing supply constraints, increased deliveries, and completion of delayed backlog projects. MDC deployment revenue increased $4.2 million, or 433%, year to date from 2021.
- Management expected profitability in Q4 2022, for full-year 2022, and in 2023, based on anticipated supplier deliveries and backlog conversion. It stated that projected liquidity should support operations and obligations for at least 12 months, and concluded there was no substantial doubt about going concern. These are forward-looking expectations, not assurances.
- Supply-chain delays remained and were expected by suppliers and partners to persist for at least several more quarters. Delays can defer revenue, extend inventory holding periods, and create a cash timing gap between paying vendors and collecting from customers.
- Customer concentration is material: one U.S.-based IT OEM accounted for 97% of Q3 revenue and 94% of nine-month revenue, and 91% of trade receivables at quarter-end. The filing warns that loss of, or a significant reduction in, this relationship could materially harm results.
- Other disclosed risks include higher labor costs and hiring challenges, fixed-price project cost overruns, reseller mix pressure on margins, and implementation risks for a new enterprise resource system. TSS began using that system as its system of record on October 1, 2022; it was not the financial-reporting system for the period covered.
- Related-party notes payable to entities affiliated with the board chairman were repaid in July. The lenders then exercised warrants for 1,883,326 shares, providing approximately $0.367 million and increasing shares outstanding.
Important facts for investors to verify
- Whether backlog conversion and supplier deliveries support management’s Q4, full-year 2022, and 2023 profitability expectations.
- Whether gross margins hold up as reseller/procurement activity changes, and whether higher labor costs can be passed through to customers.
- The company’s ongoing dependence on one OEM customer and its exposure to delays, customer payment timing, and receivables factoring costs.
- Available liquidity under the asset-based facility, including its borrowing-base limits and minimum-liquidity covenant, and cash needs as reseller activity scales.
- Successful operation of the new enterprise system and the effect of warrant exercises and other equity awards on dilution.