TSS, Inc. — Q3 2021 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021; filed November 15, 2021. TSS provides data-center facilities services, systems integration, and IT procurement/reseller services. All figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4.587 | $20.763 | $12.825 | $37.814 |
| Gross profit | $1.921 | $2.773 | $4.678 | $5.141 |
| Gross margin | 41.9% | 13.4% | 36.5% | 13.6% |
| Operating income (loss) | $0.228 | $0.966 | $(0.730) | $(0.260) |
| Net income (loss) | $0.123 | $0.852 | $(1.032) | $(0.558) |
| EPS, diluted | $0.01 | $0.04 | $(0.06) | $(0.03) |
- Q3 revenue fell 78% year over year; nine-month revenue fell 66%. The largest driver was reseller services, down 96% in Q3 and 88% for the nine-month period. Management cited project timing and supply constraints.
- Q3 Facilities revenue increased 5% to $2.471 million, mainly from replacement equipment and parts. Systems Integration revenue fell to $2.116 million from $18.400 million; integration services declined with lower OEM demand and reseller activity was sharply lower.
- Despite the higher Q3 gross-margin rate, gross profit declined 31% because of lower sales. Management attributed margin improvement to a lower reseller mix and reduced integration-facility operating costs. Nine-month gross profit declined 9%.
- Cash and equivalents were $11.987 million at September 30, versus $19.012 million at year-end 2020. Nine-month operating cash flow was negative $6.477 million, compared with positive $0.438 million in 2020; the company attributed much of the cash decline to paying vendors for large procurement projects collected from customers in 2020. Investing cash outflow was $0.060 million and financing cash outflow was $0.488 million.
- Current assets were $18.407 million and current liabilities $18.328 million. Total debt was $2.011 million, classified as current and due July 2022; stockholders’ equity was $2.375 million. The bank revolver had no balance outstanding, but only approximately $0.077 million was available under its borrowing base at quarter-end.
Material changes, outlook, and risks
- COVID-19-related site restrictions and supply-chain disruptions delayed deployments and equipment deliveries. Deployment revenue declined 65% in the first nine months of 2021 versus 2020. Management expected MDC deployments to recover from early 2022 as restrictions eased and supply improved.
- Management reported a significant delayed-project backlog, expected to fulfill a large portion across business lines by the first half of 2022, and noted significant reseller transactions executed after quarter-end. These expectations depend on supplier delivery timing; the filing gives no quantified revenue or earnings guidance.
- The company disclosed recurring losses and negative operating cash flows, an accumulated deficit of $66.047 million, and debt maturities. These conditions raised substantial doubt about going concern; management concluded the doubt was alleviated based on expected backlog execution and available liquidity sources. Management also cited possible SG&A reductions or new equity/debt financing if results fall short, with no assurance financing would be available on acceptable terms.
- Customer concentration is substantial: one U.S.-based IT OEM generated 96% of Q3 revenue and 93% of nine-month revenue, and represented 91% of trade receivables at quarter-end. Loss of, or reduced business from, this customer could materially affect results.
- The $1.5 million asset-based bank facility matured December 31, 2021, required minimum liquidity of $1.5 million and financial covenants, and had a 3.22% effective rate at quarter-end. Separately, $2.011 million of notes payable, including accrued in-kind interest, was due July 2022; the notes bear 12% interest and are owed to entities affiliated with the board chair.
- Subsequent to quarter-end, TSS renewed its facility lease for seven years, with approximately $6.4 million of minimum contractual payments. The filing reports no material litigation or off-balance-sheet arrangements.
Investor facts to verify
- Whether the delayed backlog converted to revenue by the first half of 2022, and whether supply-chain constraints eased as expected.
- Cash usage, working-capital needs, and vendor trade-credit availability as reseller activity changes.
- Renewal, replacement, or repayment of the bank facility at its December 2021 maturity, and repayment capacity for related-party notes due July 2022.
- Ongoing dependence on the major OEM customer and the sustainability of improved gross margins amid a fluctuating reseller mix.
- Financial impact and accounting treatment of the seven-year, $6.4 million lease commitment.