TSS, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited. TSS provides data-center and mission-critical infrastructure services, systems integration, and IT reseller services.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $10.597 million | $4.660 million |
| Gross profit | $1.601 million | $1.636 million |
| Gross margin | 15% | 35% |
| Operating income (loss) | $(277,000) | $50,000 |
| Net income (loss) | $(368,000) | $(31,000) |
| Net loss per share | $(0.02) | $0.00 |
| Operating cash flow | $(3.012) million | $17,000 |
- Revenue increased 127%, primarily from $6.773 million of reseller services, which began in Q3 2019. Systems integration revenue was $8.498 million versus $1.770 million; facilities revenue declined to $2.099 million from $2.890 million.
- Cost of revenue rose to 85% of revenue from 65%, mainly because reseller activity carries lower margins. Gross profit was about 2% below the prior-year quarter despite substantially higher revenue.
- At March 31, cash was $5.321 million, down from $8.678 million at December 31, 2019. Current assets were $6.825 million and current liabilities $4.707 million. The $3.012 million operating cash outflow was driven largely by a $7.013 million reduction in accounts payable, associated with reseller activity and timing.
- Long-term borrowings were $2.079 million, consisting primarily of related-party notes bearing 12% annual interest and maturing in July 2022. Lease liabilities totaled $1.450 million. No amounts were drawn on the $1.5 million revolving credit facility; borrowing availability was approximately $198,000.
- The company failed to meet the revolver’s total interest coverage and total leverage ratios for the quarter; the lender waived those requirements for this period. The facility also requires minimum liquidity of $500,000, excluding availability.
Material changes, outlook, and risks
- Facilities operating income fell to $19,000 from $510,000; systems integration recorded a $296,000 operating loss, compared with a $460,000 loss. Companywide operating performance shifted from a $50,000 profit to a $277,000 loss.
- COVID-19 disrupted facilities work through travel and customer-site access restrictions, including a major customer’s restrictions on data-center access. Systems integration faced project delays and component supply issues, including shortages tied to production disruption in China. Management said the duration and extent of these effects were uncertain.
- A single U.S.-based IT OEM generated 94% of Q1 revenue, versus 92% a year earlier, and represented 64% of receivables at quarter-end. Management warns that loss of, or reduced business from, this customer could materially harm results.
- Management said projected cash flows, cash on hand, vendor trade credit, and available financing were expected to support operations for at least 12 months, conditional on business-plan assumptions. It noted risks from revenue shortfalls, higher costs, reseller working-capital needs, and COVID-19 impacts. Management expected SG&A to decrease in Q2 after higher Q1 audit and public-company filing costs; no specific revenue or earnings guidance was provided.
- After quarter-end, a subsidiary received an $889,858 PPP loan on April 17, 2020, at 1% interest, due April 12, 2022. The company intended to use proceeds for eligible payroll, rent, and utilities. Some or all may qualify for forgiveness, but forgiveness is not assured.
- The company reported no material litigation and no material changes in internal control over financial reporting; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-related site restrictions and supply-chain disruptions persist, and their effect on project delivery and customer demand.
- Whether reseller revenue can grow without continued margin pressure or significant working-capital swings.
- Customer concentration, receivable collection, and the sustainability of vendor trade credit supporting reseller activity.
- Compliance with bank-facility covenants after the quarter and the extent of usable borrowing availability.
- The amount of PPP loan forgiveness ultimately approved and the resulting repayment obligations.
- The terms and related-party nature of the 12% notes, including their security and relationship to the board chairman.