TSS, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. 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 2021 | Q1 2020 |
|---|---|---|
| Revenue | $5.170 million | $10.597 million |
| Gross profit / margin | $1.305 million / 25% | $1.601 million / 15% |
| Operating loss | $607,000 | $277,000 |
| Net loss | $699,000 | $368,000 |
| Basic and diluted loss per share | $0.04 | $0.02 |
| Cash used in operating activities | $10.028 million | $3.012 million |
| Capital expenditures | $1,000 | $177,000 |
Revenue fell 51%. Gross margin improved as lower-margin procurement and reseller revenue made up a smaller share of sales; gross profit nevertheless declined 18.5%. SG&A increased 1% to $1.775 million, while depreciation and amortization was $137,000. Interest expense was $85,000.
Revenue mix: Facilities revenue was $1.580 million, down 25%; systems integration revenue was $3.590 million, down 58%. Procurement and reseller revenue declined 68% to $2.162 million. Integration services revenue was $1.428 million, down 17%; maintenance revenue was $902,000, and facilities deployment and other services were $387,000.
Balance sheet, debt and liquidity
At March 31, 2021, cash was $8.903 million, down from $19.012 million at year-end 2020. Total assets were $13.143 million, total liabilities $10.603 million, and stockholders’ equity $2.540 million. Current assets were $10.592 million and current liabilities $8.230 million.
Operating cash use primarily reflected payment of vendor balances tied to large procurement projects collected from customers before year-end: accounts payable and accrued expenses fell from $13.374 million to $2.860 million. Management said vendor trade credit helps finance reseller activity, but project timing can cause significant quarterly cash fluctuations.
Long-term borrowings were $2.282 million, with no current portion reported. They include related-party notes bearing 12% annual interest, split between cash and in-kind interest, due July 2022. Operating lease liabilities totaled $780,000. The Texas Capital Bank asset-based revolver has a $1.5 million maximum, but the borrowing base limited availability to approximately $233,000 at quarter-end; there were no borrowings outstanding. It matures December 31, 2021 and includes minimum-liquidity and financial covenants.
Management stated that, assuming cash-flow projections are achieved, it expects adequate capital for at least the next 12 months. It identified lower-than-projected revenue, higher costs, greater working-capital needs, COVID-19 effects, and growth in reseller services as risks to that assessment. Potential responses include expense reductions or new equity or debt, but management cautioned these steps might not fully address a material liquidity impact.
Changes, outlook and risks
- The COVID-19 pandemic continued to restrict access to customer sites and delay projects. Management said facilities deployment revenue was down 60% year over year, in part because of restrictions and customer deferrals. It also cited supply-chain and logistics issues and pandemic-related operating costs in systems integration.
- One U.S.-based IT OEM accounted for 93% of Q1 revenue, compared with 94% in Q1 2020, and 47% of trade receivables at March 31. A second U.S. technology customer represented 21% of receivables. Loss of, or reduced business from, the principal OEM could materially hurt results.
- Procurement and reseller projects can produce pronounced quarterly revenue, earnings and working-capital swings. Management’s strategy emphasizes maintenance and integration services, which it says historically earn higher margins; a higher reseller mix could reduce overall gross margin.
- The filing gives no specific revenue or earnings guidance. Management said COVID-related restrictions and supply-chain challenges could continue to negatively affect the business, and described the data-center market as competitive, with larger rivals having greater resources.
- The company reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2021. It reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company can sustain liquidity as cash declines and operating cash flow remains negative, particularly under the revolver’s minimum-liquidity and other covenants.
- How much revenue and receivables remain concentrated in the principal OEM, and whether that customer’s demand recovers or further weakens.
- Whether procurement/reseller volumes, project timing, vendor credit and associated working-capital needs produce further large cash-flow swings.
- Whether COVID-related site restrictions, customer deferrals and supply-chain constraints ease, and how those factors affect deployment revenue and operating costs.
- The terms, related-party nature and July 2022 maturity of the 12% notes, as well as the status and capacity of the revolver after its December 2021 maturity.
- The company repurchased 101,199 shares during the quarter at an average $0.86 per share; the filing says these were acquired from associates to satisfy tax withholding on equity awards, not under a publicly announced repurchase plan.