TSS, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. TSS provides data-center and mission-critical facility services, including maintenance, deployment, equipment sales, and systems integration. All revenue was generated in the United States.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $4.660 million | $4.849 million |
| Gross profit / margin | $1.636 million / 35% | $1.866 million / 38% |
| Operating income | $50,000 | $185,000 |
| Net income (loss) | $(31,000) | $81,000 |
| Operating cash flow | $17,000 provided | $394,000 used |
- Revenue fell 4%; cost of revenue rose to 65% of revenue from 62%, contributing to lower gross margin and profit. Interest expense increased to $109,000 from $93,000. Reported basic and diluted loss per share rounded to $0.00.
- Cash was $6.026 million at March 31, versus $6.178 million at December 31, 2018. Cash declined $152,000 during the quarter. Capital expenditures were $63,000; financing cash use was $106,000, including $137,000 of treasury-share repurchases, partly offset by $31,000 from option exercises.
- Total assets were $10.893 million and total liabilities were $8.477 million. Long-term borrowings had a net carrying value of $1.878 million; the related notes have $1.995 million principal and mature in July 2022. The notes bear 12% annual interest, half paid in cash and half in kind, and are owed partly to entities affiliated with the board chairman.
- The company had no balance outstanding on its $1.5 million receivables-based bank credit facility; borrowing availability was approximately $149,000. It reported compliance with facility covenants, including a $500,000 minimum liquidity requirement. Current and non-current operating lease liabilities totaled $1.950 million.
Changes and management commentary
- Facilities revenue declined $489,000 to $2.890 million, while systems integration revenue increased $300,000 to $1.770 million. Facilities operating income fell to $510,000 from $705,000; systems integration reported an operating loss of $460,000, compared with $520,000.
- Year-over-year comparisons reflect the sale of the critical power and cooling business in Q4 2018. Management said the remaining facilities business benefited from more modular data-center deployments, while systems integration grew on higher modular fit-outs and rack services. The deployments also involved higher third-party costs and lower margins.
- Adoption of lease accounting standard ASC 842 on January 1, 2019 added right-of-use assets and lease liabilities; the filing reports a $1.96 million adoption adjustment. This was primarily a balance-sheet change.
- Management stated that, if cash-flow projections are achieved, it expects adequate resources to operate for at least 12 months. It provided no specific numerical earnings or revenue guidance. Management cited possible expense reductions or new debt or equity financing if results fall short, while noting financing availability is not assured.
Risks, contingencies, and other items
- Customer concentration is significant: one U.S.-based IT OEM generated 92% of Q1 revenue, versus 76% in Q1 2018, and represented 69% of March 31 receivables. The filing warns that a loss or reduction in this relationship could materially affect results.
- Management highlighted competition, revenue and working-capital variability, fixed-price contract cost-estimation risk, labor availability and subcontracting costs, and the possibility that liquidity needs exceed estimates. The credit facility is secured by substantially all company assets and has financial covenants.
- The company reported no material litigation known to management and no off-balance-sheet arrangements. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the concentrated OEM relationship and receivables exposure remain stable, and whether customer orders support the stated liquidity outlook.
- Whether deployment and subcontracting costs continue to pressure gross margins, and whether systems integration improves profitability.
- Cash-flow and working-capital trends, actual borrowing availability under the receivables-based facility, and continued compliance with its covenants.
- The terms, related-party nature, interest burden, and potential dilution associated with outstanding notes and warrants.
- The effects of lease obligations and any future financing or capital needs; the filing does not provide clear quantitative guidance for future results.