TSS, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet amounts are as of March 31, 2018, unless otherwise noted. Dollar amounts below are in millions except per-share data. TSS provides data-center facilities services and systems integration, operating in the Facilities and Systems Integration segments.
Financial results and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $4.849 | $4.389 |
| Gross profit / margin | $1.866 / 38% | $1.859 / 42% |
| Operating income | $0.185 | $0.300 |
| Net income | $0.081 | $0.254 |
| Basic / diluted EPS | $0.01 / $0.00 | $0.02 / $0.02 |
| Cash used in operating activities | $0.394 | $0.684 |
| Cash used in investing activities | $0.037 | Cash provided: $0.281 |
| Cash used in financing activities | $0 | $0.454 |
- Cash was $1.837 million, down from $2.268 million at December 31, 2017. Total assets were $7.143 million and total liabilities were $7.318 million.
- Current assets of $4.214 million were below current liabilities of $5.448 million, a working-capital deficit of approximately $1.234 million. Stockholders’ equity was negative $0.175 million.
- Long-term borrowings were reported at $1.702 million net of discount and issuance costs; notes payable principal was $1.995 million, plus $0.071 million accrued interest. Interest expense was $0.093 million.
- Cash and cash equivalents decreased by $0.431 million during the quarter. Operating cash use included a $0.985 million increase in receivables, partly offset by a $0.429 million increase in deferred revenue.
Changes and operating performance
- Revenue increased 10% year over year. Facilities revenue rose $0.891 million to $3.379 million, while Systems Integration revenue fell $0.431 million to $1.470 million.
- Management attributed Facilities growth to more modular data-center deployments and retrofit or upgrade work. Systems Integration was affected by shortages of critical components, including hard drives, that delayed order completion.
- Gross margin declined to 38% from 42%, primarily because lower Systems Integration revenue reduced utilization of that segment’s facility and increased its cost burden. Gross profit was nearly unchanged.
- SG&A declined 10% to $1.575 million, which management attributed to lower headcount-related costs after the 2017 sale of part of the project-management business.
- Q1 2017 operating income included a $0.321 million gain on that business-component sale. Excluding the gain, the prior-year operating comparison differs materially from the reported figures.
- Facilities segment operating income increased to $0.705 million from $0.558 million; Systems Integration segment operating loss widened to $0.520 million from $0.258 million.
Liquidity, outlook, and risks
- Management said it expects adequate capital to operate for at least the next 12 months if cash-flow projections are met. However, the filing states that the company’s operating-loss history, negative working capital, and stockholders’ deficit raise substantial doubt about its ability to continue as a going concern. The financial statements contain no adjustments that might result if the company cannot continue as a going concern.
- Liquidity depends on cash on hand, operating cash flows, and potential financing. The receivables factoring agreement permits RTS Financial to purchase eligible receivables at its discretion, advances 80% of face value, and charges prime plus 7%; TSS reported it had not used the facility since June 2017 and was evaluating bank-based revolving-credit alternatives. The facility has no committed maximum.
- Management cited possible responses if performance or liquidity falls short, including reducing costs, seeking debt or equity financing, or selling operations. It cautioned that financing may not be available on acceptable terms and cost reductions could impair service offerings.
- A single U.S.-based IT OEM accounted for 76% of Q1 revenue, up from 63% a year earlier, and 66% of receivables at quarter-end. Loss or reduction of business from this customer could materially affect results.
- Debt includes related-party notes: MHW and MHW Partners are affiliated with the board chairman; their notes carry 12% annual interest, split between cash and payment-in-kind interest, and are secured by substantially all assets. Warrants were issued in connection with financing. Additional loans included $0.300 million from a shareholder and $0.100 million from another lender; these loans are non-interest-bearing and mature in 2022.
- Management reported revenue of $4.8 million was flat with Q4 2017. It described a competitive market, larger competitors, fluctuating quarterly results, fixed-price contract cost-estimation risks, and potential hiring, labor, and material-cost pressures. No specific numerical revenue or earnings guidance was provided.
- TSS adopted the new revenue-recognition standard on January 1, 2018, with no material impact. Maintenance deferred revenue of $2.444 million was expected to be recognized within one year; $0.479 million of other deferred revenue was expected over one to three years.
- The company reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Whether operating cash flow and working capital improve, and whether the company can meet its going-concern liquidity assumptions.
- Availability and terms of replacement or additional financing, including the status and usability of the RTS factoring arrangement.
- Whether the OEM relationship and order levels remain stable, and whether customer concentration or receivable exposure changes.
- Whether Systems Integration component availability and facility utilization recover sufficiently to improve margins and segment profitability.
- The cash cost, maturity terms, security interests, and potential dilution associated with related-party debt and outstanding warrants.