TSS, Inc. — Q1 2016 Form 10-Q
Business context and period. TSS provides planning, design, construction management, maintenance, and systems integration services for mission-critical facilities, including data centers. This filing covers the three months ended March 31, 2016; financial statement amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $7.675 | $7.272 |
| Gross profit / margin | $1.305 / 17% | $2.404 / 33% |
| Operating loss | $(1.094) | $(0.330) |
| Net loss | $(1.167) | $(0.402) |
| Loss per share | $(0.07) | $(0.03) |
| Cash from (used in) operations | $0.694 | $(1.347) |
- Revenue grew 6% year over year, but cost of revenue rose to 83% of revenue from 67%, reducing gross margin to 17% from 33%. Management attributed the margin decline to a less favorable mix, greater equipment procurement, and lower utilization of the systems integration facility.
- SG&A fell 13% to $2.252 million, mainly due to lower headcount-related costs and professional fees. The resulting operating loss widened by $0.764 million.
- Operating cash flow improved despite the higher net loss, primarily reflecting a $3.793 million reduction in receivables. Cash declined $0.263 million during the quarter to $0.869 million after investing outflows of $0.081 million and financing outflows of $0.876 million.
- At March 31, total assets were $8.695 million, total liabilities $10.390 million, and stockholders’ deficit $1.695 million. Current assets of $5.275 million were below current liabilities of $9.458 million; the current ratio was approximately 0.56.
- Reported borrowings included $1.356 million under the revolving credit line, $363,000 of current long-term borrowings, and $900,000 of noncurrent borrowings. The filing reports $475,000 principal due to director and CTO Gerard Gallagher and $945,000 principal due to MHW, an entity affiliated with the board chairman.
Changes, outlook, and risks
- Facilities revenue rose 40% to $6.733 million, driven by a large customer project; systems integration revenue fell 62% to $0.942 million, primarily due to weaker demand from the largest channel partner. Facilities segment operating results were $0.658 million versus $0.995 million; systems integration reported a $0.228 million loss versus $0.545 million income.
- A U.S.-based data center company represented 41% of Q1 revenue (1% in Q1 2015); a U.S.-based IT OEM represented 22% (56% in Q1 2015). Customer concentration and timing of large projects create revenue and working-capital volatility.
- Management said it expected adequate resources for at least 12 months if business-plan cash-flow projections are achieved, but cautioned that lower-than-expected revenue, higher costs, and greater working-capital needs could impair liquidity. The filing cites operating losses, a declining current ratio, and stockholders’ deficit as sources of going-concern uncertainty. No specific revenue or earnings guidance was provided.
- The Bridge Bank facility was terminated in May 2016. TSS entered a full-recourse receivables factoring agreement with RTS, which may purchase eligible receivables at its discretion and advances 80% of face value, with financing costs at prime plus 7%. The filing says the adequacy and liquidity impact of this arrangement had not yet been determined. An initial $668,000 funding repaid Bridge Bank obligations.
- Gallagher’s notes were amended to extend maturity to July 2017, with scheduled principal payments and a 5% interest rate from January 2016. MHW’s $945,000 loan matures in February 2020, bears 12% interest, and is secured by substantially all company assets, subordinated to senior debt.
- Management reported no material litigation, and stated that disclosure controls and internal control over financial reporting were effective as of March 31, 2016.
Important facts for investors to verify
- Whether the RTS factoring arrangement provides sufficient, dependable working-capital funding and what its fees and recourse obligations mean for cash flow.
- Progress on returning to positive operating results, especially gross margin, systems integration utilization, and the mix of lower-margin project-management and procurement work.
- Customer concentration, project timing, receivables collection, and the company’s ability to meet its liquidity projections and debt obligations.
- Availability and terms of any additional financing; management disclosed it was evaluating debt and equity alternatives, with no assurance financing would be available.