TSS, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. TSS provides data-center and mission-critical facility services, including facilities maintenance and systems integration. All revenue was generated in the United States.
Financial performance
| Metric (USD thousands, except per-share data) | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | 3,539 | 5,367 | 8,199 | 10,216 |
| Gross profit | 1,452 | 2,065 | 3,088 | 3,931 |
| Gross margin | 41% | 38% | 38% | 38% |
| Operating income | 2 | 449 | 52 | 632 |
| Net income (loss) | (94) | 319 | (125) | 398 |
| Basic and diluted EPS | ($0.01) | $0.02 | ($0.01) | $0.02 |
| Operating cash flow | Not separately presented for quarter | 155 | 1,188 |
Quarterly revenue declined 34%; first-half revenue declined 20%. The company attributed much of the first-half decrease to the sale of its critical power and cooling business in Q4 2018. Excluding that disposed business, remaining-business revenue was down 4% in the first half. Q2 gross margin improved year over year, primarily due to lower costs on modular data-center deployment maintenance contracts, but lower revenue reduced gross profit by 30%.
Q2 facilities revenue was $2.041 million versus $3.167 million; systems integration revenue was $1.498 million versus $2.200 million. Segment operating results were $515,000 for facilities and a $513,000 loss for systems integration, leaving $2,000 consolidated operating income. Lower modular deployments, refresh projects, fit-outs, and rack-services revenue weighed on activity; reduced utilization also pressured integration economics.
Balance sheet, debt, and liquidity
- At June 30, 2019, cash was $6.070 million, total current assets $7.331 million, total assets $10.766 million, total liabilities $8.350 million, and stockholders’ equity $2.416 million.
- Long-term borrowings were $1.928 million carrying value, with no current portion. Notes mature in July 2022 and bear 12% interest, half paid in cash and half paid in kind. The loans are secured and include related-party debt associated with entities affiliated with the board chairman.
- The $1.5 million asset-based revolving credit facility had no balance outstanding. Eligible borrowing availability was approximately $190,000 at quarter-end. TSS reported compliance with its financial covenants; the facility requires at least $500,000 minimum liquidity, excluding availability.
- Operating lease liabilities totaled $1.876 million ($585,000 current; $1.291 million non-current). Adoption of ASC 842 on January 1, 2019 resulted in recognition of approximately $1.96 million of lease right-of-use assets and related liabilities.
- First-half cash decreased $108,000 to $6.070 million: operating cash flow of $155,000, capital expenditures of $164,000, and net financing outflow of $99,000. Operating cash flow was lower than the prior-year period, reflecting lower profitability and timing of customer billings and project payments.
Outlook, risks, and notable items
- Management said cash, expected operating cash flows, and available credit were expected to provide adequate resources for at least the next 12 months, conditional on meeting business-plan projections. Lower-than-expected revenue, higher costs, or greater working-capital needs could weaken liquidity. No specific financial guidance was provided.
- Customer concentration is significant: one U.S.-based IT OEM accounted for 90% of Q2 revenue and 91% of first-half revenue, and 65% of receivables at June 30. The filing warns that losing or receiving materially fewer orders from this customer could significantly harm results.
- Management cited competition from larger, better-resourced companies, dependence on major customers, variable project timing, and the risk that fixed-price contract costs exceed estimates. Direct-labor utilization and the mix of employee versus subcontracted labor also affect margins.
- The company repurchased 20,012 shares during the quarter, principally to satisfy option exercise prices or tax withholding on restricted-stock vesting; these were not purchases under a publicly announced plan.
- TSS reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2019. It reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the OEM relationship and order levels remain stable, given the high revenue and receivables concentration.
- Whether systems integration can restore profitability and improve facility utilization as project volumes fluctuate.
- Whether operating cash flow and working-capital timing support management’s 12-month liquidity assessment; verify the limited $190,000 borrowing availability and covenant headroom.
- The terms and related-party aspects of the 12% secured notes, including payment-in-kind interest, maturity, and warrants.
- The effects of the disposed power and cooling business and lease obligations on comparisons, margins, and future cash needs.