TSS, Inc. — Q3 2015 Form 10-Q
Business and period: TSS provides construction, maintenance, and systems-integration services for data centers and other mission-critical facilities. This filing covers the quarter and nine months ended September 30, 2015; financial statement amounts below are in millions unless stated otherwise.
Financial performance
- Third-quarter revenue: $6.29 million, up 1% year over year. Facilities construction and maintenance revenue rose 23% to $5.29 million; systems-integration revenue fell 47% to $1.01 million, primarily due to lower demand from the largest channel partner.
- Nine-month revenue: $19.41 million, down 1% from $19.58 million. Facilities construction and maintenance revenue increased to $14.94 million from $14.36 million, while systems integration declined to $4.47 million from $5.22 million.
- Profitability: Q3 gross profit was $2.00 million (32% margin), versus $2.16 million (35%) a year earlier. The operating loss widened to $0.53 million from $0.29 million, and net loss widened to $0.60 million from $0.37 million. Loss per share was $0.04 versus $0.02.
- Nine-month profitability: Gross profit was $5.85 million (30% margin), down from $6.06 million (31%). Operating loss improved to $1.99 million from $2.35 million, and net loss improved to $2.22 million from $2.56 million. Loss per share was $0.14 versus $0.17.
- Cash flow: Operating activities used $1.09 million in the first nine months, compared with $1.62 million used in the prior-year period. Investing activities used $0.28 million; financing activities provided $0.99 million. Cash declined by $0.39 million to $0.99 million.
Balance sheet and liquidity
- At September 30, cash was $0.99 million, current assets were $5.71 million, and current liabilities were $9.17 million; the current ratio was approximately 0.62. Stockholders’ equity was a deficit of $0.73 million, compared with positive equity of $0.95 million at December 31, 2014.
- Reported debt included $1.39 million outstanding under the bank facility, $0.58 million of current convertible notes, and $0.79 million of noncurrent notes payable, net of discount. The bank facility allows up to $6 million subject to its borrowing base, matures in May 2016, and had approximately $0.4 million available at quarter-end. The company reported covenant compliance.
- In February 2015, TSS borrowed $0.945 million under a five-year, 12% interest-only term loan from an entity affiliated with the board chairman. The loan is secured by substantially all company assets and subordinated to the bank debt; warrants were issued with the loan.
Changes, outlook, and risks
- Nine-month SG&A declined 8% year over year to $7.41 million, contributing to the improvement in the year-to-date operating loss. In Q3, however, SG&A increased 2% and cost of revenue rose as a share of revenue, reflecting mix and lower systems-integration volume.
- Management gave no specific numerical revenue or earnings guidance. It described efforts to grow higher-margin maintenance and integration work, improve labor utilization and margins, and continue managing costs and working capital.
- Management stated that operating losses, a stockholders’ deficit, and a declining current ratio raise substantial doubt about the company’s ability to continue as a going concern. TSS was seeking additional financing, but had no agreed terms or assurance of availability; absent funding, it might reduce or defer activities or sell operations.
- Customer concentration is significant: the largest U.S. IT OEM accounted for 37% of Q3 revenue and 44% of nine-month revenue. Large project timing can also cause revenue and working-capital volatility.
- Disclosure controls were deemed ineffective at September 30 because of material weaknesses in financial reporting controls. Remediation work was underway but had not yet been fully tested.
- The company revised prior-period share-count information after identifying an error involving canceled restricted shares; it concluded prior filings were not materially misstated and did not require amendment. No material litigation or off-balance-sheet arrangements were reported.
Investor verification priorities
- Assess near-term liquidity, borrowing-base availability, the May 2016 bank-facility maturity, and the company’s ability to obtain additional funding.
- Track whether systems-integration demand and utilization recover, and whether the shift toward higher-margin services improves gross margins.
- Review customer concentration, project timing, receivable collection, and working-capital requirements.
- Confirm the progress and effectiveness testing of internal-control remediation, and review the terms and potential dilution from the related-party loan warrants.