TSS, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial statement amounts below are in millions of dollars unless otherwise noted. TSS provides data-center and mission-critical facility services, systems integration, and IT procurement/reseller services. Its reportable segments are Facilities and Systems Integration.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Revenue | $3.068 | $6.454 | $8.238 | $17.051 |
| Gross profit | $1.452 | $0.767 | $2.757 | $2.368 |
| Gross margin | 47% | 12% | 33% | 14% |
| Operating loss | $(0.351) | $(0.949) | $(0.958) | $(1.226) |
| Net loss | $(0.456) | $(1.042) | $(1.155) | $(1.410) |
| Loss per share, basic and diluted | $(0.03) | $(0.06) | $(0.06) | $(0.08) |
| Cash used in operating activities | Not separately stated for the quarter | $(11.252) | $(1.903) |
At June 30, 2021, cash was $7.273 million, versus $19.012 million at December 31, 2020. Total current assets were $9.821 million and current liabilities $8.008 million. Long-term borrowings were $1.979 million; lease liabilities totaled $0.609 million. Stockholders’ equity was $2.190 million. No amount was outstanding on the bank revolving facility.
Material changes and drivers
- Revenue fell 52% in both the quarter and first half. The largest contributor was lower procurement/reseller activity: down 96% year over year in Q2 and 77% in H1. Management said this newer business has had significant project-timing-driven revenue fluctuations.
- Q2 Facilities revenue increased 4% to $1.613 million, while Systems Integration revenue fell to $1.455 million from $4.896 million. H1 Facilities revenue declined 13% to $3.193 million; Systems Integration revenue fell 62% to $5.045 million.
- Gross profit improved despite lower revenue, reflecting a smaller share of lower-margin reseller sales and reduced integration-facility operating costs. Q2 gross profit rose 89%; H1 gross profit rose 16%.
- Operating and net losses narrowed year over year. SG&A increased 5% in Q2 and 3% in H1.
- H1 operating cash use increased substantially, primarily because the company paid vendors in early 2021 for large procurement projects for which customer payments had been received in late 2020. Accounts payable declined from $12.550 million at year-end to $0.701 million at June 30.
Liquidity, debt, outlook, and risks
- Management said it expects available resources to support operations for at least the next 12 months, conditional on meeting business-plan cash-flow projections. It identified cash, operating cash generation, customer financing programs, vendor trade credit, and bank-facility borrowings as liquidity sources. It also noted expense reductions or new equity/debt as possible responses if results fall short, while cautioning these actions may not fully address a material liquidity impact.
- The $1.5 million asset-based revolving facility matures December 31, 2021 and is secured by substantially all company assets. At June 30, borrowing availability was approximately $205,000 and borrowings were zero. The facility requires minimum liquidity of $1.5 million and compliance with leverage and fixed-charge coverage covenants.
- Long-term borrowings include related-party notes bearing 12% interest, with a July 2022 maturity and security over company assets. In June 2021, the company paid $352,000 to retire separate related-party loans early after lenders offered a repayment discount.
- TSS factors certain OEM receivables without recourse to support working capital. It factored approximately $11.9 million of receivables in H1 2021 and incurred $58,000 in fees.
- One U.S.-based IT OEM accounted for 87% of Q2 revenue and 91% of H1 revenue; it represented 49% of trade receivables at June 30. Management describes the relationship as economically important.
- COVID-19-related site restrictions, customer delays, and supply-chain interruptions continued to affect deployments and integration demand. Management anticipated more modular data-center deployments in H2 2021 as customer restrictions eased, but stated that the duration and effects of the pandemic were uncertain.
- Other risks include reseller project volatility, reliance on vendor trade credit, competition from larger providers, fixed-price contract cost overruns, and potential need for additional capital. The filing provides no quantified earnings or revenue guidance.
- The filing reports no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2021.
Key facts for investors to verify
- Whether revenue and project volumes recover, especially in reseller activity, and whether the expected H2 deployment improvement occurs.
- Whether operating cash use moderates and vendor trade credit remains available as procurement activity changes.
- Compliance with the credit facility’s minimum-liquidity and financial covenants, facility availability, and refinancing or repayment needs at its December 2021 maturity.
- The company’s continued dependence on its largest OEM customer and the concentration of receivables among a small number of customers.
- Whether improved gross margins can be sustained as the mix of reseller, integration, and Facilities work shifts.