TSS, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. TSS provides data-center facilities services and systems integration, including procurement and reseller services. All revenue was generated in the U.S.
Financial results
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $6.574 million | $5.192 million; up 27% |
| Gross profit / margin | $1.686 million / 26% | $1.666 million / 32% |
| Operating loss | $665,000 | $173,000 loss |
| Net loss / diluted loss per share | $786,000 / $0.04 | $308,000 / $0.02 |
| Operating cash flow | $(13.545) million | $4.880 million provided |
| Cash and cash equivalents | $6.666 million at March 31 | $20.397 million at December 31, 2022 |
SG&A rose 31% to $2.262 million, mainly from higher compensation and professional fees. Interest expense was $112,000, versus $124,000. The company reported negative working capital of $499,000. It had no borrowings under its revolving credit facility at quarter-end; lease liabilities totaled $4.785 million, of which $638,000 was current.
Performance changes and cash flow
- Facilities revenue increased 8% to $2.236 million, supported by maintenance revenue. Systems integration revenue increased 39% to $4.338 million; integration services rose to $2.612 million from $1.373 million.
- Despite revenue growth, gross margin fell to 26% from 32%, primarily due to higher integration labor costs. Management said core integration and maintenance margin, excluding reseller activity, was 30% versus 40% a year earlier.
- Operating cash outflow was driven largely by paying vendors after year-end accounts payable had increased by about $14 million, and by a $7 million increase in inventory for a reseller transaction completed in early April. Cash fell by $13.731 million during the quarter.
- Capital expenditures were $185,000, primarily for integration-facility leasehold improvements.
Liquidity, outlook, and risks
- Management cited accumulated deficit of $67.2 million, negative working capital, recent operating losses, and Q1 operating cash outflow as liquidity concerns, but concluded substantial doubt about the company’s ability to continue as a going concern was not present. Management said projected liquidity should cover at least the next 12 months, subject to business-plan assumptions.
- Management expected delayed customer transactions to occur in Q2 2023 and forecast profitability in Q2 and for full-year 2023. This is management’s expectation, not a guarantee.
- The Susser Bank facility in place during Q1 had a $1.5 million maximum, an 8.00% effective rate at March 31, and a May 5, 2023 maturity. The company renewed it on May 11, 2023, through May 5, 2024; the renewal carried an 8.25% rate at inception and retained a $1.5 million maximum and $1.5 million minimum-liquidity requirement.
- A single U.S.-based IT OEM represented 90% of Q1 revenue and 79% of receivables at March 31. The filing identifies dependence on this customer as a material business risk.
- Supply-chain constraints continued to delay integration projects; management said vendors and partners expected issues to persist for at least several more quarters. Revenue and margins may also fluctuate with project timing, reseller mix, labor utilization, and costs on fixed-price contracts.
- The company factored approximately $10.9 million of receivables in Q1 2023, versus $15.3 million in Q1 2022, and paid $143,000 in related financing fees, recorded as interest expense.
Important facts for investors to verify
- Whether delayed projects converted to revenue and whether the forecast of Q2 and full-year profitability was achieved.
- Whether operating cash flow and working capital improved after the Q1 vendor payments and inventory build.
- Availability and covenant compliance of the renewed credit facility, including its minimum-liquidity requirement.
- Customer concentration, ongoing supply constraints, integration labor costs, and the impact of lower-margin reseller activity on gross margin.