Business Context and Reporting Period
This Form 8-K was filed by TSS, Inc. on May 6, 2016, reporting events occurring on that date. The Company, along with subsidiaries Innovative Power Systems, Inc. and VTC, L.L.C., executed a new Factoring Agreement with RTS Financial Service, Inc. and simultaneously terminated a prior financing arrangement with Bridge Bank.
Key Financial Metrics and Agreements
- New Factoring Facility: Entered into a Factoring Agreement with RTS Financial Service, Inc. allowing the sale of eligible accounts receivable.
- Initial Funding: Received an initial funding of $668,000 under the new agreement.
- Cost of Capital: RTS fees are calculated daily at the prime rate plus 7.0% divided by 360.
- Advance Rate: RTS pays 80% of the Purchased Account amount upon purchase, with the balance (less fees) paid upon collection.
- Collateral: Obligations are secured by substantially all present and future accounts receivable (excluding one customer), chattel paper, equipment, inventory, and deposit accounts.
- Terminated Facility: Repaid and terminated a Business Financing Agreement with Bridge Bank that provided a line of credit up to $6 million.
Material Changes Versus Prior Period
The Company replaced its existing $6 million revolving credit facility with Bridge Bank, which was maturing on May 21, 2016, with a new accounts receivable factoring arrangement. The outstanding balance under the Bridge Bank agreement was fully repaid using the initial proceeds from the new Factoring Agreement. No early termination or prepayment penalties were incurred regarding the Bridge Bank facility.
Guidance, Risks, and Contingencies
- Term and Renewal: The Factoring Agreement has an initial 12-month term and automatically renews for successive 12-month periods unless terminated.
- Termination Fees: TSS may terminate at the end of the initial term with 60 days' notice and a $10,000 fee. Termination during the first 24 months requires 30 days' notice and a fee based on the average monthly amount purchased.
- Repurchase Obligations: TSS must repurchase accounts if warranties are breached, obligations are defaulted, or if an account is not paid in full by the due date or within 120 days of the invoice date.
- Liquidity Risk: The new facility relies on the collection of specific accounts receivable, and RTS retains discretion on which accounts to purchase.
Investor Verification Checklist
- Verify the specific customer excluded from the collateral pool under the Factoring Agreement.
- Confirm the current prime rate to calculate the effective interest cost of the new facility.
- Review the full text of the Factoring Agreement (Exhibit 99.1) for detailed default triggers and repurchase conditions.
- Assess the impact of the 80% advance rate on the Company's working capital availability compared to the previous $6 million line of credit.