TSSI 10-Q
TSS, Inc. (TSSI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act : None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of November 13, 2023:
TSS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2023
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“SAFE HARBOR” STATEMENT |
ii |
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PART I–FINANCIAL INFORMATION |
1 |
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Item 1. Consolidated Financial Statements |
1 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
20 |
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Item 4. Controls and Procedures |
20 |
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PART II–OTHER INFORMATION |
20 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
20 |
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Item 6. Exhibits |
21 |
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SIGNATURES |
22 |
“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward- looking statements made in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as those made in other filings with the SEC.
Forward looking statements can be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee” or other similar words. Such forward looking statements are based on management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.
As used herein, except as otherwise indicated by the context, the terms “TSS”, “Company”, “we”, “our” and “us” are used to refer to TSS, Inc. and its subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TSS, Inc.
Consolidated Balance Sheets
(in thousands except par values)
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September 30, 2023 |
December 31, 2022 |
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(unaudited) |
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Current Assets: |
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Cash and cash equivalents |
$ | $ | ||||||
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Contract and other receivables, net |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Lease right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Other assets |
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Total assets |
$ | $ | ||||||
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Current Liabilities: |
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Accounts payable and accrued expenses |
$ | $ | ||||||
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Deferred revenues |
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Current portion of lease liabilities |
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Total current liabilities |
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Non-current portion of lease liabilities |
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Total liabilities |
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Commitments and Contingencies |
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Stockholders’ Equity: |
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Preferred stock, $ par value; |
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Common stock, $ par value; |
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Additional paid-in capital |
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Treasury stock |
( |
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( |
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Accumulated deficit |
( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Consolidated Statements of Operations
(in thousands, except per-share amounts; unaudited)
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Three Months Ended September 30 |
Nine Months Ended September 30 |
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2023 |
2022 |
2023 |
2022 |
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Results of Operations: |
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Revenue |
$ | $ | $ | $ | ||||||||||||
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Cost of revenue |
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Gross profit |
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Selling, general and administrative expenses |
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Depreciation and amortization |
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Total operating costs |
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Income from operations |
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Other income (expense): |
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Interest expense, net |
( |
) |
( |
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( |
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( |
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Income (loss) from operations before income taxes |
( |
) |
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Income tax expense |
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Net income (loss) |
$ | $ | $ | ( |
) |
$ | ||||||||||
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Basic income (loss) per common share |
$ | $ | $ | ( |
) |
$ | ||||||||||
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Diluted income (loss) per common share |
$ | $ | $ | ( |
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$ | ||||||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts, unaudited)
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Additional |
Total |
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Common Stock |
Paid-in |
Treasury Stock |
Accumulated |
Stockholders’ |
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Shares |
Amount |
Capital |
Shares |
Amount |
Deficit |
Equity |
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Balance January 1, 2022 |
$ | $ | ( |
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$ | ( |
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$ | ( |
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$ | |||||||||||||||||
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Restricted stock vested |
- | - | - | - | - | |||||||||||||||||||||||
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Treasury shares repurchased |
- | - | - | ( |
) |
( |
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- | ( |
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Stock-based compensation |
- | - | - | - | - | |||||||||||||||||||||||
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Net loss |
- | - | - | - | - | ( |
) |
( |
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Balance at March 31, 2022 |
( |
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( |
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( |
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Restricted stock vested |
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Stock options exercised |
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Treasury shares repurchased |
( |
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Stock-based compensation |
- | - | ||||||||||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||
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Balance at June 30, 2022 |
( |
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( |
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( |
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Restricted stock vested |
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Warrants exercised |
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Treasury shares repurchased |
( |
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( |
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( |
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Stock-based compensation |
- | - | ||||||||||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||
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Balance at September 30 ,2022 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
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Additional |
Total |
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Common Stock |
Paid-in |
Treasury Stock |
Accumulated |
Stockholders’ |
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Shares |
Amount |
Capital |
Shares |
Amount |
Deficit |
Equity |
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Balance January 1, 2023 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
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$ | |||||||||||||||||
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Restricted stock vested |
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Treasury shares repurchased |
( |
) |
( |
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( |
) |
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Stock-based compensation |
- | - | ||||||||||||||||||||||||||
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Net loss |
- | - | ( |
) |
( |
) |
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Balance at March 31, 2023 |
( |
) |
( |
) |
( |
) |
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Restricted stock vested |
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Treasury shares repurchased |
( |
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( |
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( |
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Stock-based compensation |
- | - | ||||||||||||||||||||||||||
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Net Income |
- | - | ||||||||||||||||||||||||||
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Balance at June 30, 2023 |
( |
) |
( |
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( |
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Restricted stock vesting |
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Treasury shares repurchased |
( |
) |
( |
) |
( |
) |
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Stock-based compensation |
- | - | ||||||||||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||
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Balance at September 30, 2023 |
$ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Consolidated Statements of Cash Flows
(in thousands; unaudited)
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Nine Months Ended September 30, |
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2023 |
2022 |
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Cash Flows from Operating Activities: |
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Net income (loss) |
$ | ( |
) |
$ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
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Depreciation and amortization |
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Amortization of debt discount |
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Stock-based compensation |
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Changes in operating assets and liabilities: |
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Contract and other receivables |
( |
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( |
) |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
( |
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( |
) |
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Inventories, net |
( |
) |
( |
) |
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Prepaid expenses and other assets |
( |
) |
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Right-of-use assets |
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Accounts payable and accrued expenses |
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Deferred revenues |
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Operating lease liabilities |
( |
) |
( |
) |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: |
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Capital expenditures |
( |
) |
( |
) |
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Net cash used in investing activities |
( |
) |
( |
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Cash Flows from Financing Activities: |
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Proceeds from issuance of equity |
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Proceeds from exercise of warrants |
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Repayment of long-term debt |
( |
) |
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Repurchase of stock |
( |
) |
( |
) |
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Net cash provided by (used in) financing activities |
( |
) |
( |
) |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
$ | $ | ||||||
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Cash paid for taxes |
$ | $ | ||||||
See accompanying notes to the consolidated financial statements.
TSS, Inc.
Notes to Consolidated Statements
(unaudited)
Note 1 – Significant Accounting Policies
Description of Business
TSS, Inc. (‘‘TSS’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’) provides a comprehensive suite of services for the planning, design, deployment, maintenance, refresh and take-back of end-user and enterprise systems, including the mission-critical facilities they are housed in. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Our corporate offices and our integration facility are located in Round Rock, Texas.
Basis of Presentation
The accompanying consolidated balance sheet as of December 31, 2022, which has been derived from audited consolidated financial statements, and the unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the SEC for interim reporting and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations, changes in stockholders’ equity and cash flows. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Liquidity
As of September 30, 2023, the Company had an accumulated deficit of $
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have a been able to grow our revenues and order backlog and seen an improvement in supply chain constraints. We believe that we will be profitable in the next quarter and for the year ended December 31, 2023. As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period of time.
Revenue Recognition
We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative standalone selling prices.
Maintenance Services
We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. Our contract terms are typically one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services on a ratable basis over the contract term. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment, however our history of non-payments and bad debt expense has been insignificant.
Integration Services
We generate integration services revenues from fees that provide our customers with customized system and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods. We typically extend credit terms to our integration customers based on their credit worthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-60 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ credit worthiness. As of September 30, 2023, and December 31, 2022, our allowance for doubtful accounts was $
Equipment Sales
We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods. Typically, we do not receive advance payments for equipment sales; however, if we do, we record the advance payment as deferred revenues. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment sales are typically due within 30-45 days of invoicing.
Deployment and Other Services
We generate revenues from fees we charge our customers for other services, including repairs or other services not covered under maintenance contracts, installation and servicing of equipment, including modular data centers that we sold, and other fixed-price services, including repair, design and project management services. In some cases, we arrange for a third party to perform warranty and servicing of equipment, and in these instances, we recognize revenue as the amount of any fees or commissions that we expect to be entitled to receive. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional.
Reseller Services
We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our reseller services revenue upon completion of the procurement activity. In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided to our customers by another party and we have no control of the goods before they are transferred to the customer. In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commissions that we expect to be entitled to after paying the other party for the goods or services provided to the customer. Accounts receivable from our reseller activities are typically due within 30-60 days of invoicing.
The following table shows our revenues disaggregated by reportable segment and by product or service type (in ’000’s, unaudited):
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Three-Months Ended September 30, |
Nine-Months Ended September 30, |
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2023 |
2022 |
2023 |
2022 |
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FACILITIES: |
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Maintenance revenues |
$ | $ | $ | $ | ||||||||||||
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Equipment sales |
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Deployment and other services |
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Total Facilities revenues |
$ | $ | $ | $ | ||||||||||||
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SYSTEMS INTEGRATION: |
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Integration services |
$ | $ | $ | $ | ||||||||||||
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Reseller services |
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Total Systems Integration revenues |
$ | $ | $ | $ | ||||||||||||
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TOTAL REVENUES |
$ | $ | $ | $ | ||||||||||||
Judgments
We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.
Sales Taxes
Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.
Shipping and Handling Costs
Costs for shipping and handling activities, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of revenues and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has transferred to the customer.
Remaining Performance Obligations
Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of one year or less, we have elected the practical expedient applicable to such contracts and we do not disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of September 30, 2023, deferred revenue of $
Concentration of Credit Risk
We are currently economically dependent upon our relationship with a large US-based IT OEM. If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it would significantly reduce our revenue.
The following customer accounted for a significant percentage of our revenues for the periods shown (unaudited):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2023 |
2022 |
2023 |
2022 |
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US-based IT OEM |
% | % | % | % | ||||||||||||
No other customers represented more than 10% of our revenues for any periods presented. Our US-based IT OEM customer represented
Non-recourse factoring
We have entered into a factoring agreement with a financial institution to sell certain of our accounts receivables from a US-based IT OEM customer under a non-recourse agreement. Under the arrangement, we sell certain trade receivables on a non-recourse basis and account for the transaction as a sale of the receivables. The financial institution assumes the full risk of collection, without recourse to the Company in the event of a loss. Debtors are directed to send payments directly to the financial institution. The applicable receivables are removed from our consolidated balance sheet when the cash proceeds are received by us. We do not service any factored accounts after the factoring has occurred. We utilize this factoring arrangement as part of our financing for working capital. The aggregate gross amount factored under this arrangement was approximately $
Recent Accounting Guidance
Recently Issued Accounting Pronouncements
In June 2016, FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets. Among the provisions of ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need only consider past events and current conditions in measuring an incurred loss. We are subject to this guidance effective with the consolidated financial statements we issue for the year ending December 31, 2023, and the quarterly periods during that year. We adopted this guidance effective January 1, 2023 and it did not have a material impact on our financial results of operations.
In May 2019, FASB issued Accounting Standards Update 2019-15, Financial Instruments – Credit Losses (Topic 326), (AASU 2019-15”). ASU 2019-15 provides guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit loss standard to measure financial assets at amortized cost (except held-to-maturity securities) using the fair value option. The effective date and transition methodology are the same as in ASU 2016-13. We adopted this guidance effective January 1, 2023 and it did not have a material impact on our financial results of operations.
Note 2 – Supplemental Balance Sheet Information
Receivables
Contract and other receivables consisted of the following (in ‘000’s):
|
September 30, 2023 (unaudited) |
December 31, 2022 |
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|
Contract and other receivables |
$ | $ | ||||||
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Allowance for doubtful accounts |
( |
) |
( |
) |
||||
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Contracts and other receivables, net |
$ | $ | ||||||
Contract assets consisting of accounts receivable and costs in excess of billings were $
Inventories
We state inventories at the lower of cost or net realizable value, using the first-in-first-out-method (in ‘000’s) as follows:
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September 30, 2023 (unaudited) |
December 31, 2022 |
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Materials and component parts |
$ | $ | ||||||
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Reseller inventories |
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Reserve |
( |
) |
( |
) |
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Inventories, net |
$ | $ | ||||||
Goodwill and Intangible Assets, Net
Goodwill and intangible assets, net consisted of the following (in ‘000’s):
|
September 30, 2023 (unaudited) |
December 31, 2022 |
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Gross |
Gross |
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Carrying |
Accumulated |
Carrying |
Accumulated |
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Amount |
Amortization |
Amount |
Amortization |
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Intangible assets not subject to amortization: |
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|
Goodwill |
$ | - | $ | - | ||||||||||||
|
Intangible assets subject to amortization: |
||||||||||||||||
|
Customer relationships |
$ | $ | ( |
) |
$ | $ | ( |
) |
||||||||
|
Acquired software |
$ | $ | ( |
) |
$ | $ | ( |
) |
||||||||
Goodwill attributable to reporting units (in ‘000’s):
|
September 30, 2023 (unaudited) |
December 31, 2022 |
|||||||
|
Facilities unit |
$ | $ | ||||||
|
Systems Integration unit |
||||||||
|
Total |
$ | $ | ||||||
At September 30, 2023 and December 31, 2022, both the facilities unit and the systems integration unit had negative carrying amounts on our records.
We recognized amortization expense related to intangibles of approximately $
We have elected to use December 31 as our annual date to test goodwill and intangibles for impairment. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period, we will evaluate goodwill and other long-lived intangible assets for impairment. We performed a quantitative analysis of our goodwill and intangibles at December 31, 2022 as part of our annual testing for impairment and concluded that there was no impairment. We considered relevant matters, including macroeconomic conditions and the effects of COVID-19 on our operations, and there was no identified material triggering events or circumstances that occurred during the three and nine-month periods ended September 30, 2023 or 2022 that indicated the carrying value of our goodwill and other long-lived intangible assets was impaired.
Property and Equipment
Property and equipment consisted of the following (in ’000’s):
| Estimated
Useful Lives (years) |
September 30, 2023 (unaudited) |
December 31, 2022 |
|||||||||||
|
Trade equipment |
$ | $ | |||||||||||
|
Leasehold improvements |
- | ||||||||||||
|
Motor vehicles |
|||||||||||||
|
Furniture and fixtures |
|||||||||||||
|
Computer equipment and software |
|||||||||||||
|
Less accumulated depreciation |
( |
) |
( |
) |
|||||||||
|
Property and equipment, net |
$ | $ | |||||||||||
Depreciation of property and equipment and amortization of leasehold improvements and software totaled $
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in ’000’s):
|
September 30, 2023 (unaudited) |
December 31, 2022 |
|||||||
|
Accounts payable |
$ | $ | ||||||
|
Accrued expenses |
||||||||
|
Compensation, benefits and related taxes |
||||||||
|
Other accrued expenses |
||||||||
|
Total accounts payable and accrued expenses |
$ | $ | ||||||
Note 3 – Revolving Line of Credit
In May 2023, we renewed our revolving line of credit (the “credit facility”) with Susser Bank, National Association (“Lender”) pursuant to a Business Loan Agreement (Asset Based) (the “Loan Agreement”) dated effective May 5, 2023. The obligations under the credit facility are secured by substantially all of our accounts receivable. Our wholly owned subsidiaries, Vortech LLC, and VTC, L.L.C. jointly and severally guarantee our obligations under the credit facility.
The maximum amount of the credit facility is $
The credit facility requires that we maintain a minimum liquidity of $
The Loan Agreement and ancillary documents include customary affirmative covenants for secured transactions of this type, including maintaining adequate books and records, periodic financial reporting, compliance with laws, maintenance of insurance, maintenance of assets, timely payment of taxes, and notices of adverse events. The Loan Agreement and ancillary documents include customary negative covenants, including incurrence of other indebtedness, mergers, consolidations and transfer of assets and liens on our assets. The Loan Agreement and ancillary documents also include customary events of default, including payment defaults, failure to perform or observe terms, covenants or agreements included in the Loan Agreement and ancillary documents, insolvency and bankruptcy defaults, judgment defaults, material adverse change defaults, and change of ownership defaults.
The maximum amount we would have been eligible to borrow at September 30, 2023 was approximately $
Note 4 - Leasing Arrangements
We have operating leases for our office and integration facilities as well as for certain equipment and vehicles. Our leases have remaining lease terms of
We determine if an arrangement is a lease at inception. Operating leases are included in lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our consolidated balance sheet. We have elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. We also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, we did not need to reassess whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.
Right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight- line basis over the lease term. Components of lease expense and other information is as follows (in ‘000’s):
| Three Months Ended
September 30, (unaudited) |
Nine Months Ended September 30, (unaudited) |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Lease expense |
||||||||||||||||
|
Operating lease cost |
$ | $ | $ | $ | ||||||||||||
|
Operating Lease – operating cash flows |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
New right-of-use assets – operating leases |
||||||||||||||||
The following presents information regarding the Company's operating leases as of September 30:
|
2023 |
2022 |
|||||
|
Weighted average remaining lease term – operating leases (months) |
||||||
|
Weighted average discount rate – operating leases |
Future minimum lease payments under non-cancellable leases as of September 30, 2023 were as follows (in ‘000’s):
|
Fiscal Year |
||||
|
2023 |
$ | |||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
Thereafter |
||||
|
Total minimum future lease payments |
||||
|
Less imputed interest |
( |
) |
||
|
Total |
$ | |||
|
Reported as of September 30, 2023: |
||||
|
Current portion of lease liability |
$ | |||
|
Non-current portion of lease liability |
||||
| $ | ||||
Note 5 - Net Income (Loss) Per-Share
Basic and diluted net income (loss) per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purposes of determining diluted income (loss) per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.
The following table presents a reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations for net income (loss). In the table below, net income (loss) represents the numerator and shares represents the denominator (in thousands except per share amounts; unaudited).
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Basic net income (loss) per share: |
||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income (loss) |
$ | $ | $ | ( |
) |
$ | ||||||||||
|
Denominator: |
||||||||||||||||
|
Weighted-average shares of common stock outstanding |
||||||||||||||||
|
Basic net income (loss) per share |
$ | $ | $ | ( |
) |
$ | ||||||||||
|
Diluted net income (loss) per share: |
||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net income (loss) |
$ | $ | $ | ( |
) |
$ | ||||||||||
|
Denominator: |
||||||||||||||||
|
Weighted-average shares of common stock outstanding |
||||||||||||||||
|
Dilutive options and warrants outstanding |
||||||||||||||||
|
Number of shares used in diluted per share computation |
||||||||||||||||
|
Diluted net income (loss) per share |
$ | $ | $ | ( |
) |
$ | ||||||||||
Note 6 - Segment Reporting
Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by our chief operating decision-maker in assessing performance and allocating resources. Our activities are organized into major segments: facilities and systems integration. Our facilities unit is involved in the design, project management and maintenance of data center and mission-critical business operations. Our systems integration unit integrates IT equipment for OEM vendors and customers to be used inside data center environments, including modular data centers, and also includes our reseller services where we procure equipment to be used in our integration activities. All revenues are derived from the U.S. market. Segment operating results reflect earnings before acquisition related expenses, other expenses, net, and provision for income taxes.
Revenue and operating results by reportable segment reconciled to reportable net income (loss) for the three and nine-month periods ended September 30, 2023 and 2022 and other segment-related information is as follows (in ‘000’s, unaudited):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Revenues: |
||||||||||||||||
|
Facilities |
$ | $ | $ | $ | ||||||||||||
|
Systems integration services |
||||||||||||||||
|
Total revenues |
$ | $ | $ | $ | ||||||||||||
|
Depreciation and amortization expense: |
||||||||||||||||
|
Facilities |
$ | $ | $ | $ | ||||||||||||
|
Systems integration services |
||||||||||||||||
|
Consolidated depreciation and amortization expense |
$ | $ | $ | $ | ||||||||||||
|
Income from operations: |
||||||||||||||||
|
Facilities |
$ | $ | $ | $ | ||||||||||||
|
Systems integration services |
( |
) |
( |
) |
( |
) |
||||||||||
|
Total income from operations |
$ | $ | $ | $ | ||||||||||||
|
Interest expense, net: |
||||||||||||||||
|
Facilities |
$ | $ | $ | $ | ||||||||||||
|
Systems integration services |
||||||||||||||||
|
Consolidated interest expense |
$ | $ | $ | $ | ||||||||||||
|
September 30, 2023 |
December 31, 2022 |
|||||||
|
Total Assets: |
||||||||
|
Facilities |
$ | $ | ||||||
|
Systems integration services |
||||||||
|
Other consolidated activities |
||||||||
|
Total |
$ | $ | ||||||
Other consolidated activities include assets not specifically attributable to each business segment including cash and cash equivalents, prepaid expenses and other assets that are managed at a corporate level.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2022 included in our 2022 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2022 Annual Report on Form 10-K for a discussion of items that may affect our future results.
Overview
TSS, Inc. (‘‘TSS’’, the ‘‘Company’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’) provides comprehensive services for the planning, design, deployment, maintenance, and refurbishment of end-user and enterprise systems, including the mission-critical facilities they are housed in. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services include technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement and reseller services. Our headquarters and our integration facility are in Round Rock, Texas.
Our business is concentrated in the data center infrastructure and services market. This market continues to grow and remains highly competitive as commerce moves to cloud-based solutions and as data storage requirements continue to escalate for many industries. The demand for AI solutions is also fueling demand for higher performance computing capability.These underlying macroeconomic trends are continuing to drive demand for more information technology equipment and more efficient data center design and operation, resulting in continued growth in this market. We compete against many larger competitors who have greater resources than we do, which may affect our competitiveness in the market. We rely on several large customers to win contracts and to provide business to us under ‘‘Master Service Agreements’’, and the loss of such customers or a material decline in volume from such customers would have a material negative effect on our results.
The majority of the components used in our systems integration business are consigned to us by our original equipment manufacturer (OEM) or their end-user customers, thus our revenue reflects only the services we perform, and the consigned components are not reflected in our income statement or on our balance sheet. We also offer our customers the ability to procure third-party hardware, software and services on their behalf that are then used in our integration services as we integrate these components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction. These procurement and reseller services allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher profits on integration projects by broadening our revenue and customer base.
Our facilities business rebounded in the latter part of 2022 as COVID related supply chain conditions improved and the number of Modular Data Center (MDC) deployments that we performed increased as we satisfied the backlog that had accumulated during the COVID pandemic. This led to a $3.9 million increase in revenues from MDC deployments in our fiscal year 2022, and we have since seen a decrease of $3.5 million in revenues from MDC deployments in the first nine months of 2023 compared to the same period in 2022. This whiplash impact has altered the underlying demand and delivery of MDC deployments, and we expect that the number of MDC deployments will fluctuate on a quarterly basis for the foreseeable future, causing our quarterly revenues and profits to fluctuate. To offset this, we are selectively investing in direct sales capabilities to work alongside our OEM partners to re-create demand lost during and post the pandemic period.
Our systems integration business was negatively impacted during the COVID pandemic due to logistical and supply-chain issues. Supply constraints that initially were due to disruptions caused by the pandemic have continued to occur and create obstacles that still affect component supply to us and negatively impact our integration revenue. We believe that these constraints will be as bad as during the pandemic period and are optimistic that increases in demand for AI solutions will create more opportunity for our integration business. As this technology evolves including direct liquid-cooled solutions, we believe that this will present new growth opportunity for our integration business. Despite these ongoing challenges, overall, there has been an improvement in supply chain issues since the second half of 2022 that has helped our integration services revenues grow by 31% during the first nine months of 2023 compared to the same period in 2022.
RESULTS OF OPERATIONS
Revenue
Revenue consists of fees earned from the planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenue from providing system configuration and integration services, including procurement and reseller services, to IT equipment vendors. Currently we derive all our revenue from the U.S. market.
We contract with our customers under five primary contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements, and thus yield lower profit margins than time-and-materials and fixed-price arrangements which generate higher profit margins generally, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter into comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.
Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability.
We have been concentrating our sales efforts towards maintenance and integration services where we have traditionally earned higher margins. Historically we performed design and project-management services in a concentrated number of high-value contracts for the construction of new data centers. In addition to contributing to large quarterly fluctuations in revenue depending upon project timing, these projects required higher levels of working capital and generated lower margins than our maintenance and integration services. We re-focused our design and project management services towards smaller scaled jobs typically connected with addition/move/retrofit activities rather than new construction, to obtain better margins. We have also focused on providing maintenance services for modular data center applications as this market continues to expand. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding services such as procurement and reseller services, to help drive volume through the integration facility.
Revenues of $8.9 million for the three-month period ended September 30, 2023 represented an increase of $0.8 million or 10% compared to the third quarter of 2022. The increase was primarily driven by an increase in our procurement and reseller services where our revenues increased by $2.3 million compared to the third quarter of 2022, driving a total increase of $2.3 million in our systems integration segment. Revenues in our facilities segment decreased by $1.5 million compared to the third quarter of 2022 due to a $1.5 million decrease in revenues from MDC deployments. In 2022 we were fulfilling the backlog of MDC deployments we had accumulated during the COVID pandemic, and due to a combination of lower demand and component shortages, the volume of MDC activity has decreased since late 2022.
On a year-to-date basis, for the nine-month period ended September 30, 2023, our total revenue of $30.0 million has increased by $10.3 million or 52% compared to the first nine months of 2022 when we recorded revenue of $19.7 million. This was driven by a $13.7 million increase in revenues from our systems integration segment attributable to a 31% increase in integration services and $12.1 million increase in revenues from procurement and reseller activities. This was offset by a $3.4 million decrease in our facilities revenues as the number of MDC deployments decreased compared to 2022.
Although we have seen an improvement in recent quarters in the supply chain constraints that prevented our partners and customers from delivering all of the products needed for us to complete and perform integration services, we are still being impacted by ongoing supply issues. These supply chain disruptions cause delays in the timing of systems integration and MDC deployment revenue for us as we await delivery of required components, and our vendors and partners expect these supply-chain issues to continue for at least the next several quarters.
Our reseller and procurement revenues involve us procuring third-party hardware, software and services on our customers’ behalf that are then typically used in our integrated services as we integrate those components to deliver a completed system to our customer. In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction and recognize revenue as the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer. We had an increase in volume of reseller and procurement business during the third quarter of 2023 compared to 2022, and our total revenues from reseller and procurement services was approximately $5.4 million in 2023 compared to $3.1 million in the third quarter of 2022. For the nine-month period ended September 30, 2023, our total revenues from reseller and procurement business was approximately $17.7 million, up 216% or $12.1 million from $5.6 million in the comparable period of 2022.
Cost of Revenue
Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expense, equipment and other costs associated with our test and integration facilities, excluding depreciation of our manufacturing property and equipment, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. The cost of revenue as a percentage of revenue was 68% for the three-month period ended September 30, 2023 compared to 66% for the third quarter of 2022. This increase from the third quarter of 2022 reflects higher costs, including labor costs, in our integration business compared to the prior year and the impact of higher reseller and procurement activities. Absent the reseller business, the profit margin from our core integration and maintenance services was 34% in the third quarter of 2023 compared to 41% in the third quarter of 2022.
For the nine-month period ended September 30, 2023, our cost of revenue as a percentage of revenue was 74%. This compares to 64% in the comparable period of 2022. This increase is primarily due to the higher proportion of our total revenue that is from procurement and reseller services in 2023.
The level of expected revenue from our reseller services has and will continue to fluctuate significantly on a quarterly basis. As a result, our cost of revenue as a percentage of total revenue will also fluctuate significantly. Cost of revenue for reseller services is higher than cost of revenue for our integration and maintenance services.
Since we earn higher profits when using our own labor services, we expect gross margins to improve when our labor services mix increases relative to the use of subcontracted labor or third-party labor. Our direct labor costs are relatively fixed in the short-term, and the utilization of direct labor is critical to maximizing our profitability. As we continue to bid and win contracts that require specialized skills that we do not possess, we would expect to have more third-party subcontracted labor to help us fulfill those contracts. In addition, we can face hiring challenges in internally staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead improves our overall profitability by increasing income, broadening our revenue base and generating a favorable return on invested capital. As we increase the level of IT reseller services in the future, we anticipate that our overall gross margin will decrease as the normal margins on reseller activities are lower than the margins from our traditional facilities and systems integration services.
A large portion of our revenue is derived from fixed price contracts. Under these contracts, we set the price of our services and assume the risk that the costs associated with our performance may be greater than we anticipated. Our profitability is therefore dependent upon our ability to estimate accurately the costs associated with our services. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid on the contract, and higher than expected costs of materials and labor. Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity.
Gross Profit
Our gross profit margin for the three-month period ended September 30, 2023 was 32% compared to a gross profit margin of 34% in the third quarter of 2022. This decrease in margin as a percentage of revenues compared to the third quarter of 2022 was primarily attributable to an increase in costs, particularly labor costs, in our integration business and from the higher percentage of our total revenue that came from procurement and reseller services. As the percentage of total revenue from procurement and reseller services increases, our gross margin will decrease as the cost of sales is higher for this revenue than our traditional integration and facilities revenues. The growth in our total revenues compared to 2022 allowed us to increase our overall gross profit by 2%, to $2.8 million in the third quarter of 2023 compared to the third quarter of 2022. The 52% increase in our total revenues for the first nine-months of 2023 compared to the first nine months of 2022 has allowed us to increase our gross profits by $0.7 million in 2023 compared to 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of compensation and related expenses, including variable sales compensation, for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurances and other corporate costs. For the three-month period ended September 30, 2023, our selling, general and administrative expenses increased by $217,000 or 12% compared to the third quarter of 2022 primarily due to higher compensation costs and from higher professional fees. For the nine-month period ended September 30, 2023, our selling, general and administrative expenses increased by $1.3 million or 25% compared to the first nine months of 2022, primarily due to higher compensation costs and selective new hires to drive customer demand.
Income (Loss) from Operations
For the three-month period ended September 30, 2023, we recorded operating income of $715,000. This compares to operating income of $871,000 that we had in the third quarter of 2022. For the nine-month period ended September 30, 2023, we recorded operating income of $1,025,000, compared to operating income of $1,637,000 that we recorded in the first nine months of 2022.
Interest expense, net
For the three-month period ended September 30, 2023, we recorded interest expense of $661,000. This compares to $263,000 in the three-month period ended September 30, 2022. The increase in interest expense was due to an increase in the value of transactions that were factored which was approximately $61.4 million in the quarter ended September 30, 2023, compared to an amount factored of $27.4 million in the third quarter of 2022. This increase in amounts factored was because of a higher number of agent-type transactions that were factored in our procurement and reseller business compared to 2022. For the nine-month period ended September 30, 2023, we recorded interest expense of $1,473,000, compared to $554,000 in the same period of 2022. The increase in interest expense was due to both an increase in interest rates in 2023 and an increase in the value of transactions that were factored which was approximately $109.9 million in the nine-month period ended September 30, 2023, compared to an amount factored of $53 million in the same period of 2022. This increase in amounts factored was because of a higher number of agent-type transactions that were factored. This increase in interest attributable to factoring was partially offset by 2023 not having any interest expense for related party debt which was extinguished in July 2022. We were also able to offset this increase in expense with $179,000 of interest income during the three-month period ended September 30, 2023 as we managed cash flows from reseller transactions and were able to invest surplus funds until required.
Net Income (Loss)
After net interest expense and income taxes we recorded net income of $209,000 or $0.01 per share for the three-month period ended September 30, 2023. This compares to net income of $605,000 or $0.03 per share for the three-month period ended September30, 2022. For the nine-month period ended September 30, 2023, we recorded a net loss of $262,000 or $(0.01) per share. This compares to net income of $1,068,000 or $0.05 per share that we recorded in the first nine-months of 2022.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity at September 30, 2023 are our cash and cash equivalents on hand, funds available to us under our revolving line of credit, vendor trade-credit and projected cash flows from operating activities.
As of September 30, 2023, the Company had an accumulated deficit of $66.6 million. We have recorded operating and net income in three of our four most recent quarters but have a history of annual operating and net losses over recent years which have been due, in part, to the effects of COVID-19 and related supply chain constraints. These factors may be indicative of doubt regarding the Company’s ability to continue as a going concern. Management has evaluated the significance of these conditions in relation to its ability to meet its obligations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations, including the funds from our customer financing programs, funds available under our bank revolving credit facility and trade credit extended to us by our vendors. If our future results do not meet expectations, management believes that we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that we would take further steps such as the issuance of new equity or debt. We may also require additional capital if we seek to acquire additional businesses as a way to increase the scale of our operations, or if there is a sudden increase in the level of reseller and procurement services. There can be no assurance as to the Company’s ability to scale its business operations on terms upon which additional financing may be available.
Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have been able to grow our revenues and order backlog and seen an improvement in related supply-chain constraints. Our quarterly results have been impacted during 2023 by transactions being delayed by our customers, but based on our outlook, we believe that we will be profitable in the next quarter and for the year ended December 31, 2023. As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern.
If we continue to meet the cash flow projections in our current business plan, we expect that we will have adequate capital resources necessary to continue operating our business and meet our debt obligations for at least the next twelve months. Our business plan and our assumptions around the adequacy of our liquidity are based on estimates regarding expected revenues and future costs. However, there are potential risks, including that our revenues may not meet our projections, our costs may exceed our estimates, or our working capital needs may be greater than anticipated. Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectation of cash usage in 2023 and beyond or significantly affect our level of liquidity, which may limit our opportunities to grow our business.
At September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $28.7 million and $20.4 million, respectively.
Significant Uses of Cash
Operating Activities:
Cash provided by operating activities was $8.6 million for the nine-month period ended September 30, 2023, compared to cash provided by operating activities of $3.6 million for the nine-month period ended June 30, 2022. This change was primarily attributable to the timing and financial impacts of our procurement and reseller services. The volume of procurement and reseller activities was higher at the end of our third quarter in 2023 compared to both the third quarter of 2022 and the end of fiscal 2022. At the end of this most recent quarter, we were able to be paid by our customers for a number of large procurement projects, but we had yet to recognize revenue or to pay our vendors for these same projects. This resulted in an increase of approximately $11 million in our deferred revenue and approximately $10 million in our outstanding accounts payable at September 2023 compared to September 2022, and our accounts receivable increased by approximately $4 million compared to September 2022 due to these reseller transactions. Compared to our financial year end 2022 balances, our deferred revenues have increased by $11 million and our receivables have increased by $4 million because of the higher level of reseller activities, driving the $8.3 million increase in cash during 2023. We have been able to structure our procurement and reseller activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities. However, due to timing it is possible to see fluctuations on a quarterly basis for reseller contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit available to us to continue financing our reseller activities as we grow this business during 2023 and beyond. Otherwise, the change in cash provided by operating activities was primarily due to loss from operations.
Investing Activities:
Cash used in investing activities was $240,000 in the nine-month period ended September 30, 2023 which was primarily spent on leasehold improvements for our integration facility, compared to cash used in the same period of 2022 of $213,000 for purchases of property and equipment.
Financing Activities:
Cash used in financing activities was $33,000 in the nine-month period ended September 30, 2023, compared to cash used in financing activities of $1.7 million in the nine-month period ended September 30, 2022. The cash used in financing activities in 2023 was for the purchase of stock related to tax obligations around vesting of restricted stock by our employees. In 2022 we used $80,000 for tax obligations around restricted stock vesting and we received $31,000 in proceeds from the exercise of stock options by employees. We also received $367,000 in proceeds from the exercise of warrants by our former note holders, and used $2.045 million to repay all of the company’s outstanding long-term debt upon its maturity in July 2022.
Future Uses of Cash
Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues may not meet our expectations, or our costs may exceed our estimates. Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectations of cash usage during 2023 or beyond or significantly affect our level of liquidity, which may require us to take other measures to reduce our operating costs in order to continue operating. Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially impact our financial results depending on the level of cost reductions taken.
Our primary liquidity and capital requirements are to fund working capital from current operations. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations including the funds from our customer financing programs. We believe that if future results do not meet expectations, we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that we could take further steps such as the issuance of new equity or debt. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses as a way to increase the scale of our operations.
Off-Balance Sheet Arrangements
As of September 30, 2023 and December 31, 2022, we had no off -balance sheet arrangements.
Critical Accounting Policies and Pronouncements
There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2022 on our consolidated financial statements and disclosures. See also Item 1. Financial Statements Note 1 – Significant Accounting Policies regarding Recent Accounting Pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Our management performed an evaluation under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were effective such that information relating to the Company required to be disclosed in the Company’s SEC reports (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding financial disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting for the three-month period ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as such term is defined in Rule 13a-15 and 15d-15 of the Exchange Act of 1934, as amended.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
We have disclosed under "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, the risk factors that may materially affect our business, financial conditions or results of operations. Except as set forth below, there have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth below and in the Annual Report on Form 10-K, and other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing the Company. In addition, risks and uncertainties not currently known to us or that we currently do not believe are material could also materially and adversely affect our business, financial condition or results of operations.
Our Contracts with the United States Government Could Be Adversely Affected by Budget Cuts or Government “Shutdowns.”
We have entered into contracts with agencies of the U.S. Government. These contracts depend upon annual funding commitments authorized by Congress. In a period of government budget cuts or other political events, such as a prolonged government shutdown, such contracts might not be re-authorized or might be temporarily suspended, adversely affecting our performance and financials.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth information about our purchases of outstanding shares of our common stock during the quarter ended September 30, 2023:
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Monthly Period During the Quarter Ended September 30, 2023 |
Total Shares Purchased |
Average Price paid per Share |
Total Shares Purchased as Part of Publicly Announced Plans |
Approximate Dollar Amount of Shares Yet To Be Purchased Under Plans |
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July 1, 2023 – July 31, 2023 |
- | $ | - | - | - | |||||||||||
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August. 1, 2023 – August 31, 2023 |
60,240 | $ | 0.37 | |||||||||||||
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September1, 2023 – September 30, 2023 |
- | $ | - | - | - | |||||||||||
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Total |
60,240 | $ | 0.37 | |||||||||||||
(a) All of these shares were acquired from associates to satisfy tax withholding requirements upon the vesting of restricted stock.
Item 6. Exhibits.
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101.INS * |
Inline XBRL Instance Document |
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101.SCH * |
Inline XBRL Taxonomy Extension Schema |
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101.CAL * |
Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF * |
Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB * |
Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE * |
Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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* |
Filed herewith. |
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** |
Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TSS, INC. |
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Date: November 13, 2023 |
By: |
/s/ John K. Penver |
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John K. Penver |
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Chief Financial Officer |
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(Principal Financial Officer) |
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