TSS, Inc. — 2022 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2022, comparing results with 2021. TSS provides data-center facilities, maintenance, systems integration, and IT procurement/reseller services, primarily in the U.S. Its operations are organized into Facilities and Systems Integration segments.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $30.637 million | $27.410 million |
| Gross profit / margin | $8.980 million / approximately 29% | $6.361 million / approximately 23% |
| Operating income (loss) | $0.914 million | $(0.831) million |
| Net income (loss) | $(0.073) million | $(1.297) million |
| Cash from (used in) operations | $14.712 million | $(10.452) million |
| Cash and cash equivalents at year-end | $20.397 million | $7.992 million |
- Facilities revenue rose 44% to $10.208 million, mainly from completion of delayed modular data-center deployments. Systems Integration revenue was $20.429 million, broadly flat; integration services grew, while procurement/reseller revenue fell 11% to $13.243 million.
- Gross margin improved chiefly because procurement/reseller activity made up a smaller share of revenue and included more agent transactions, which are recorded net. Core integration and maintenance margins declined to 37% from 44%, amid wage pressure, employee turnover, and operational inefficiencies.
- SG&A increased 15% to $7.683 million, including approximately $0.6 million related to the CEO transition. Interest expense, net, was $0.964 million in the audited statements, versus $0.430 million in 2021; the MD&A narrative gives a different 2022 figure, discussed below.
- Year-end current assets were $24.410 million and current liabilities $24.163 million, leaving approximately $0.247 million of working capital. Accounts payable and accrued expenses increased to $21.616 million from $7.016 million, largely due to procurement-project timing.
- The company repaid its long-term notes during 2022. It had no balance outstanding on its $1.5 million asset-based credit facility at year-end, but the borrowing base limited available borrowing to approximately $131,000. The facility matured May 5, 2023 and required minimum liquidity of $1.5 million. Lease liabilities totaled $4.776 million.
Material changes, outlook, and risks
- Operating cash flow benefited substantially from approximately $14.6 million of increased accounts payable at year-end as customer cash was collected before related vendors were paid. TSS reports that it paid those vendors in the first quarter of 2023, with cash and payables each declining by more than $12 million.
- Management expected to be profitable in 2023, citing project backlog, improving component availability, new integration orders, and new modular data-center customers. It stated that, assuming its cash-flow projections are met, liquidity should support operations for at least 12 months and concluded there was no substantial doubt about continuing as a going concern. This outlook is not a guarantee.
- Customer concentration is exceptionally high: one OEM accounted for 96% of 2022 revenue (95% in 2021) and 93% of year-end 2022 trade receivables. The three largest customers represented 99% of revenue in both years.
- Supply-chain disruption delayed services and revenue recognition; fixed-price contracts (about 90% of revenue), rising labor costs, competition, and customer contract cancellations create margin and execution risks. Procurement/reseller volumes can fluctuate and may require additional working capital.
- A new ERP system became the system of record on October 1, 2022 and had not yet been deployed across all business units. Management identified implementation errors or delays as possible operational and reporting risks.
- Open purchase-order commitments were approximately $29 million at year-end, with most expected to be fulfilled during the first half of 2023. A $500,000 settlement of legacy construction litigation was substantially covered by insurance; the company reported no material pending litigation.
- The auditor issued an unmodified opinion on the financial statements and identified the going-concern assessment as a critical audit matter. The filing reports no auditor attestation of internal controls; its management-control discussion states effectiveness was determined as of December 31, 2021, despite describing an assessment as of December 31, 2022.
Important facts for investors to verify
- Confirm the 2022 interest-expense figure: the audited statement reports $0.964 million, while the MD&A narrative reports $0.931 million.
- Assess liquidity after the first-quarter 2023 vendor payments, the credit facility’s May 2023 maturity, and the facility’s borrowing-base and minimum-liquidity requirements.
- Evaluate the sustainability of operating cash flow and earnings apart from year-end payables timing, and track progress toward management’s 2023 profitability outlook.
- Monitor the dominant OEM relationship, customer diversification, core service margins, labor costs, and ERP implementation.
- Review the internal-control reporting date inconsistency and confirm the status of the approximately $29 million of purchase commitments and the credit facility after year-end.