TSS, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing reports annual results; it does not provide a clear standalone fourth-quarter income statement.
Business context
TSS provides data-center facilities design, deployment and maintenance services, systems integration, and IT procurement/reseller services. Its two reportable segments are Facilities and Systems Integration. The company is focused on modular data centers and cloud IT infrastructure, but remains highly dependent on one large U.S. OEM customer.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $45.1 million | $32.8 million |
| Gross profit / margin | $6.8 million / 15% | $6.6 million / 20% |
| Operating income (loss) | ($0.4 million) | $0.5 million |
| Net income | $79,000 | $126,000 |
| Cash from operating activities | $10.0 million | $3.0 million |
| Cash and cash equivalents at year-end | $19.0 million | $8.7 million |
- Revenue rose 37%, led by procurement and reseller services, which generated $28.8 million versus $17.1 million in 2019. Systems Integration revenue increased to $36.1 million; Facilities revenue declined 3% to $9.0 million.
- Gross margin fell as reseller transactions carry lower margins; management also cited pandemic-related operating costs and reduced integration-facility utilization. Core integration and maintenance margins, excluding reseller activity, declined to 30% from 38%.
- Net income included $896,000 of other income from full forgiveness of the company’s approximately $890,000 PPP loan. The company reported an operating loss before other income and interest.
- Operating cash flow benefited materially from working-capital timing in reseller projects, including higher accounts payable. Accounts payable and accrued expenses rose to $13.4 million from $8.9 million. The company also reported $4.1 million in operating cash generated from reseller-related timing.
- Total liabilities were $20.6 million and stockholders’ equity was $3.2 million at year-end. Long-term borrowings were $2.2 million, including related-party notes; operating lease liabilities totaled $1.0 million. No borrowings were outstanding on the revolving facility at year-end.
- The company was not in compliance with financial covenants on its then-existing revolving facility and was ineligible to borrow against it at December 31, 2020. A replacement $1.5 million asset-based facility was entered into in February 2021, with a $1.5 million minimum-liquidity covenant.
Changes, outlook and risks
- COVID-19 restricted customer-site access and delayed or canceled modular data-center deployments; deployment revenue decreased 28%. Supply-chain interruptions also delayed some integration and reseller work, while safety measures raised operating costs.
- Management said it expected available resources to support operations for at least 12 months, assuming its cash-flow projections are met. It provided no quantified revenue or earnings guidance and cautioned that reseller revenue and profitability may fluctuate significantly.
- Customer concentration is acute: one customer represented 97% of revenue in 2020, up from 96% in 2019, and 70% of trade receivables at year-end. The three largest customers accounted for 99% of revenue.
- Other key risks include working-capital demands from reseller growth, short-notice contract cancellation, fixed-price project cost overruns, customer and supplier dependence, competition, pandemic effects, and potential impairment of goodwill. The company reported no goodwill impairment in 2020.
- Open purchase-order commitments were approximately $2.1 million, mostly expected to be fulfilled in the first half of 2021. The company reported no material litigation and no off-balance-sheet arrangements. The auditor issued an unmodified opinion; management concluded internal controls were effective and did not identify substantial doubt about going concern.
Most important facts for investors to verify
- Whether TSS can diversify beyond its dominant OEM customer and sustain core service revenues.
- How much of reported operating cash flow reflects durable earnings versus timing of payables, receivables, inventory and reseller projects.
- The margin and working-capital economics of procurement/reseller revenue, including the effect of gross-versus-net revenue presentation.
- Current compliance with the replacement credit facility’s liquidity and financial covenants, and availability under its receivables-based borrowing base.
- The repayment and related-party terms of the $2.0 million principal notes due in 2022, including the 12% interest terms on MHW-related notes.