TSS, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts below are in millions unless stated otherwise. TSS provides data-center facilities services and systems integration, including equipment procurement and reseller services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $6.421 | $3.068 | $11.613 | $8.238 |
| Gross profit / margin | $2.612 / 41% | $1.452 / 47% | $4.278 / 37% | $2.757 / 33% |
| Operating income (loss) | $0.939 | ($0.351) | $0.766 | ($0.958) |
| Net income (loss) | $0.771 | ($0.456) | $0.463 | ($1.155) |
| Diluted earnings (loss) per share | $0.04 | ($0.03) | $0.02 | ($0.06) |
For H1 2022, operating cash flow was $0.469 million, capital expenditures were $0.122 million, and cash increased $0.374 million to $8.366 million. Cash from operations in H1 2021 was negative $11.252 million. The filing attributes much of that comparison to the timing of customer receipts and vendor payments on procurement projects.
At June 30, 2022, total assets were $20.598 million, current assets $13.358 million, current liabilities $13.059 million, and stockholders’ equity $2.907 million. Current borrowings were $2.044 million; lease liabilities totaled $5.240 million. Working capital was approximately $0.299 million.
Material changes and operating drivers
- Q2 revenue rose 109% year over year. Facilities revenue increased 123%, mainly from a $1.8 million increase in modular data-center deployments as supply constraints eased. Systems integration revenue grew 94% as components became more available and procurement/reseller activity increased.
- H1 revenue rose 41%: facilities revenue increased 78%, while systems integration revenue increased 18%.
- Q2 gross margin declined to 41% from 47%, reflecting the business mix and higher deployment activity. H1 gross margin increased to 37% from 33%, which management attributed mainly to improved leverage on deployment projects. SG&A decreased 4% in Q2 and 3% in H1.
- Interest expense increased to $0.158 million in Q2 and $0.282 million in H1, partly due to higher factoring fees on reseller transactions.
Liquidity, debt, outlook, and risks
- The $2.044 million of related-party notes and accrued interest was repaid on July 1, 2022, before its July maturity. The notes carried a 12% annual rate and were secured by substantially all company assets.
- A new asset-based revolving facility was entered into in May 2022, with a $1.5 million maximum, a May 5, 2023 maturity, and a minimum-liquidity covenant of $1.5 million. No amount was drawn at June 30; the borrowing-base calculation limited eligible availability to approximately $121,000.
- Management cited delayed backlog, improved component deliveries, and expected continued improvement as support for profitability in Q3 and for full-year 2022. It concluded there was no substantial doubt about the company’s ability to continue as a going concern, while acknowledging prior annual losses and dependence on forecast cash flows.
- Key risks include continuing supply-chain delays, reliance on a single U.S.-based IT OEM (94% of Q2 and H1 revenue; 90% of June 30 trade receivables), and execution and cost-estimation risks on fixed-price contracts. Reseller revenue and margins may fluctuate; reseller activity can also affect working capital and financing costs.
- The company factored approximately $25.6 million of receivables in H1 2022 under a non-recourse arrangement and paid approximately $156,000 in fees. Management also noted that lower-than-expected revenue, higher costs, or greater working-capital needs could affect liquidity; additional equity or debt financing may be considered if needed.
- On July 19, 2022, lenders affiliated with the board chairman exercised warrants for 1,883,326 shares, generating approximately $367,000 and increasing potential shareholder dilution. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track whether the backlog converts to revenue and whether management’s Q3 and full-year profitability expectations are achieved as supply conditions evolve.
- Verify customer concentration, receivable collection, factoring volume and fees, and the availability and covenant compliance of the revolving facility.
- Review the effects of the July debt repayment and warrant exercise on cash, debt, and share count.
- Reconcile the H1 2022 EPS disclosure: the financial statements report $0.02 per diluted share, while the MD&A text states $0.03.