TSS, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report; the filing does not provide a clear standalone fourth-quarter income statement.
Business context
TSS provides data-center facilities services, systems integration, and IT equipment reseller services. In 2019 it began procuring and reselling third-party hardware, software, and services, expanding reported revenue but at lower margins than its traditional services. The company operates in the United States and reported two segments: facilities and systems integration.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $32.779 million | $22.335 million |
| Gross profit / margin | $6.591 million / 20% | $8.483 million / 38% |
| Operating income | $0.480 million | $2.866 million |
| Net income | $0.126 million | $2.437 million |
| Basic / diluted earnings per share | $0.01 / $0.01 | $0.16 / $0.13 |
| Cash provided by operating activities | $3.015 million | $1.900 million |
| Cash and cash equivalents at year-end | $8.678 million | $6.178 million |
Reseller services generated $17.140 million of 2019 revenue. Facilities revenue fell to $9.257 million from $15.186 million; systems integration segment revenue rose to $23.522 million from $7.149 million. Within systems integration, traditional integration-services revenue declined 11% to $6.382 million. Facilities segment operating income was $1.852 million versus $4.317 million; systems integration reported an operating loss of $1.372 million versus $1.451 million.
Balance sheet, debt, and liquidity
- At December 31, 2019, total assets were $17.567 million and total liabilities were $14.698 million; stockholders’ equity was $2.869 million. Current assets of $14.185 million exceeded current liabilities of $11.600 million by $2.585 million.
- Long-term borrowings were $2.028 million, including related-party notes with $1.995 million principal and accrued interest, due in 2022. The notes bear 12% annual interest, half payable in cash and half in kind, and are secured by company assets.
- No amounts were drawn on the $1.5 million revolving credit facility at year-end; reported borrowing availability was approximately $135,000. The company was not in compliance with the interest-coverage covenant at year-end, but the bank waived the requirement for that period. The facility matures December 31, 2020.
- Operating lease liabilities totaled $1.601 million. Accounts receivable increased to $3.865 million from $0.727 million, inventories to $1.353 million from $0.108 million, and accounts payable and accrued expenses to $8.851 million from $2.390 million, primarily reflecting reseller activity.
Material changes and unusual items
- Revenue increased 47%, principally due to newly launched reseller activity. Cost of revenue rose to 80% of revenue from 62%, reducing gross margin to 20% from 38%; management attributed the change mainly to reseller sales’ lower margins.
- Net income fell 96%. The 2018 comparison included a $1.140 million gain on the sale of the critical power and cooling business and profits from businesses sold or discontinued around year-end 2018. The disposed power and cooling business had contributed $1.239 million to 2018 operating income, according to the risk-factor discussion.
- Management reported $3.0 million of operating cash flow in 2019, supported in part by managing reseller working capital and increased trade payables. It expected adequate resources for at least the next 12 months if business-plan cash-flow projections were achieved.
- The company recorded $41,000 of income-tax expense and disclosed $37.1 million of net operating loss carryforwards, fully offset by a valuation allowance; use may be limited by ownership changes.
Outlook, risks, and contingencies
The filing gives no numerical revenue or earnings guidance. Management expected reseller revenue to fluctuate and acknowledged that larger reseller transactions could require additional working capital. It sought to expand customer relationships and grow higher-margin maintenance and integration services. It also warned that customer delays in modular-data-center deployments and reduced rack-integration demand affected core businesses in the second half of 2019.
- Customer concentration: One OEM generated 96% of 2019 revenue, versus 66% in 2018, and represented 96% of year-end trade receivables. The company said losing or materially reducing business with this customer could significantly harm results.
- COVID-19: The filing identifies potential impacts from workforce disruption, supply-chain interruptions, travel restrictions, and weaker customer demand; the magnitude and duration were uncertain when the report was filed.
- Execution and liquidity: Approximately 85% of revenue came from fixed-price contracts, exposing margins to cost-estimation risk. Reseller growth depends on sufficient trade credit and liquidity; management noted uncertainty about future funding needs.
- Commitments and legal matters: Open purchase-order commitments were approximately $5.6 million, mostly expected to be fulfilled in the first half of 2020. The company reported no material litigation and considered ordinary-course matters unlikely to have a material adverse effect.
- Related parties and equity: The 2018 business sale was to an entity managed by the board chairman, who was excluded from the board’s unanimous approval. Insiders beneficially owned approximately 36% of common shares as of March 24, 2020; options and warrants may also dilute shareholders.
Important facts for investors to verify
- Whether the OEM relationship remains stable and whether customer concentration declines.
- Reseller revenue quality, gross margins, collections, inventory exposure, and trade-credit availability.
- Performance of the core facilities and integration businesses, including the effects of modular-data-center delays.
- Current revolving-credit availability, covenant compliance after the waiver, and refinancing or repayment plans before the facility’s maturity.
- Fulfillment and cash impact of the $5.6 million purchase commitments, and any subsequent COVID-19 effects.
The independent auditor issued an unmodified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2019.