TSS, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. TSS provides data-center and mission-critical-facility services, systems integration, and IT procurement/reseller services. All revenue is from the United States.
Financial performance
- Q2 revenue: $14.5 million, up 126% from $6.4 million. Systems integration revenue rose to $13.0 million from $2.8 million, driven largely by procurement/reseller revenue of $10.6 million versus $0.8 million. Facilities revenue fell to $1.6 million from $3.6 million, mainly due to fewer modular data-center deployments.
- First-half revenue: $21.1 million, up 82% from $11.6 million. Systems integration increased to $17.3 million from $5.9 million; facilities declined to $3.8 million from $5.7 million.
- Gross profit and margins: Q2 gross profit was $3.2 million versus $2.6 million; gross margin decreased to 22% from 41%. First-half gross profit was $4.9 million versus $4.3 million. Cost of revenue was 78% of revenue in Q2 and 77% in the first half, versus 59% and 63% in the comparable periods. Management attributed lower margins principally to the larger reseller mix and higher integration labor costs; core integration and maintenance margin excluding reseller activity was 40% in Q2, versus 44%.
- Operating results and earnings: Q2 operating income was $975,000 versus $939,000, while net income fell to $315,000 ($0.01 per share) from $771,000 ($0.04). First-half operating income declined to $310,000 from $766,000, and TSS recorded a net loss of $471,000 ($0.02 per share), versus net income of $463,000 ($0.02).
- Expenses and interest: SG&A increased 35% in Q2 to $2.2 million and 33% in the first half to $4.4 million, primarily from compensation and professional fees. Interest expense also increased materially. The financial statements report net interest expense of $648,000 for Q2 and $760,000 for the first half; MD&A gives different figures of $672,000 and $812,000, respectively.
- Cash flow: First-half operating cash flow was $4.0 million, compared with $469,000 in 2022; capital expenditures were $205,000, and financing used $10,000. Cash increased to $24.2 million from $20.4 million. Management said operating cash flow benefited from timing: accounts payable rose about $13 million as customer receipts for large reseller projects preceded vendor payments.
Liquidity, assets, and obligations
- At June 30, cash was $24.2 million, receivables net were $10.6 million (up from $2.7 million at year-end), and current assets and current liabilities were each approximately $36.6 million. Accounts payable and accrued expenses rose to $34.3 million from $21.6 million.
- No borrowings were outstanding under the renewed asset-based revolving credit facility. It has a $1.5 million maximum, but eligible borrowing availability was approximately $285,000 at quarter-end. The interest rate was 8.25%, maturity is May 5, 2024, and the agreement requires minimum liquidity of $1.5 million.
- Operating lease liabilities totaled $4.6 million, including $658,000 current. The filing reports no off-balance-sheet arrangements. TSS had an accumulated deficit of $66.9 million and stockholders’ equity of $2.8 million.
Management outlook, risks, and notable items
- Management expects profitability in the next quarter and for full-year 2023, and believes liquidity will be adequate for at least the next 12 months if its cash-flow projections are met. It concluded there was no substantial doubt about the company’s ability to continue as a going concern, while noting its history of losses and potential need for cost reductions or additional capital if results disappoint.
- Management says supply-chain constraints continue and may delay integration and modular data-center revenue for several more quarters. Customer-delayed transactions, fluctuating deployment volumes, reseller mix, and project timing may drive quarterly volatility. Fixed-price contracts also expose TSS to cost overruns, including labor and materials.
- Customer concentration is substantial: one U.S.-based IT OEM accounted for 96% of Q2 revenue and 97% of receivables at June 30. TSS identifies this relationship as economically important; a loss or significant reduction in orders could materially harm results.
- TSS factored approximately $48.5 million of receivables in the first half under a non-recourse arrangement and paid $672,000 in related financing fees, recorded as interest expense. The filing says the arrangement supports working capital.
- The company adopted the expected-credit-loss accounting guidance on January 1, 2023; it reported no material impact. Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Reconcile the MD&A interest-expense figures with the financial-statement amounts, and assess the impact of factoring fees and reseller financing on earnings.
- Assess whether the large increase in receivables and payables reflects sustainable reseller activity and whether customer collections and vendor payment timing remain favorable.
- Monitor the dominant OEM relationship, continuing supply constraints, modular data-center deployment levels, and the effect of reseller mix on gross margins.
- Check actual borrowing availability and compliance with the facility’s minimum-liquidity requirement; the stated borrowing capacity at quarter-end was limited to approximately $285,000.
- Compare subsequent results with management’s profitability outlook for the next quarter and full-year 2023, including progress from the first-half net loss.