TSS, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. TSS provides data-center facilities, systems integration, maintenance, and IT procurement/reseller services. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $8.88 | $8.08 | $29.99 | $19.69 |
| Gross profit | $2.83 | $2.77 | $7.74 | $7.04 |
| Gross margin | 32% | 34% | 26%* | 36%* |
| Operating income | $0.72 | $0.87 | $1.03 | $1.64 |
| Net income (loss) | $0.21 | $0.61 | ($0.26) | $1.07 |
| Net income (loss) per share | $0.01 | $0.03 | ($0.01) | $0.05 |
- Revenue mix and changes: Q3 revenue rose 10%; systems integration increased $2.3 million while facilities revenue fell $1.5 million, largely as modular data-center deployments declined. Nine-month revenue grew 52%, with systems integration up $13.7 million, partly offset by a $3.4 million facilities decline. Reseller/procurement revenue was $5.4 million in Q3 and $17.7 million year to date.
- Margins and expenses: Q3 gross margin declined to 32% from 34%, reflecting integration labor costs and a greater reseller mix. Nine-month cost of revenue was 74% of revenue versus 64% a year earlier; reseller activity typically carries lower margins. SG&A increased 12% in Q3 and 25% year to date.
- Interest and factoring: The statements report net interest expense of $0.48 million in Q3 and $1.24 million year to date, versus $0.26 million and $0.54 million, respectively, in 2022. Management attributes the increase mainly to higher factoring volumes and rates. Factored receivables totaled approximately $61.4 million in Q3 and $109.9 million year to date; related fees were $0.89 million and $1.57 million, respectively.
- Cash flow: Operating cash flow was $8.58 million for the first nine months, compared with $3.55 million in 2022; capital expenditures were $0.24 million and financing cash outflow was $0.03 million. Cash increased to $28.70 million from $20.40 million at year-end 2022. Management says the cash increase was substantially driven by reseller-project timing: customer advances/deferred revenue and unpaid vendor amounts rose as projects remained in progress.
- Liquidity and obligations: Current assets were $38.09 million and current liabilities $37.70 million, leaving $0.39 million of working capital. Deferred revenue was $14.77 million, up from $2.08 million at year-end. No revolving credit borrowings were outstanding, but the $1.5 million facility’s borrowing base limited eligible availability to approximately $0.20 million at September 30; it matures May 5, 2024 and requires minimum liquidity of $1.5 million. Lease liabilities totaled $4.48 million. The company reported no off-balance-sheet arrangements.
- Equity: Stockholders’ equity was $3.09 million; accumulated deficit was $66.65 million.
*Calculated from reported gross profit and revenue.
Outlook, commentary, and risks
- Management expects profitability in the next quarter and for full-year 2023, citing revenue and backlog growth and improving supply conditions. It says projected liquidity should support operations and obligations for at least 12 months, while acknowledging results, costs, and working-capital needs may differ from estimates. Management concluded there was no substantial doubt about going concern.
- Management says supply-chain constraints continue to delay integration and modular data-center revenue and may persist for several quarters. Modular deployment activity is expected to fluctuate; procurement/reseller revenue and its lower margins may also vary substantially by quarter.
- A single U.S.-based IT OEM represented 96% of Q3 revenue and 94% of nine-month revenue, and 96% of receivables at September 30. The filing warns that loss of, or reduced business from, this customer could materially harm results.
- The company relies on factoring and vendor trade credit to support working capital, particularly for reseller transactions. Factoring costs have increased, and liquidity could be affected by timing, customer delays, insufficient trade credit, or revenue shortfalls.
- Other cited risks include competition from larger companies, cost overruns on fixed-price contracts, labor availability and costs, and potential suspension or non-renewal of U.S. government contracts during budget cuts or shutdowns. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the large deferred-revenue balance converts to revenue as expected, and whether related vendor payables and customer receipts unwind without straining cash.
- Actual Q4 and full-year profitability versus management’s forecast, including the effect of project delays and seasonal or quarterly reseller activity.
- Customer concentration, OEM relationship continuity, and the status of the backlog and supply constraints.
- Factoring volumes, fees, and the economics of reseller business; reconcile the MD&A’s gross interest-expense figures with the financial statements’ net interest-expense amounts.
- Availability under the asset-based credit facility and compliance with its minimum-liquidity covenant; note the filing reports only about $0.20 million of borrowing eligibility at quarter-end.