TSS, Inc. — 2013 Form 10-K Summary
Business and period. The filing covers the fiscal year ended December 31, 2013 and was signed April 15, 2014. TSS provides consulting, design, construction management, systems integration, and facilities management for mission-critical infrastructure, including data centers. In May 2013, it acquired assets and assumed specified liabilities of arvato digital services’ systems integration business for approximately $1.5 million.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $44.4 million | $47.7 million |
| Gross profit / margin | $9.0 million / 20.2% | $9.4 million / 19.8% |
| Operating loss | $2.6 million | $3.7 million |
| Net loss | $2.8 million; $0.19 per share | $4.0 million; $0.28 per share |
| Cash from operations | $(2.1) million | $(0.5) million |
- Revenue fell $3.3 million, principally because construction management revenue declined $8.3 million after a large 2012 project. The acquired integration business contributed $4.8 million of 2013 revenue and a $0.6 million net loss.
- Gross margin improved modestly, but SG&A rose $0.7 million to $11.2 million, partly due to $1.2 million of acquired-business expenses. The 2012 results included a $2.1 million goodwill impairment; no impairment was recorded in 2013.
- Cash and cash equivalents were $3.29 million, plus $0.50 million of restricted cash. Current assets were $13.41 million and current liabilities $13.04 million. Cash declined $2.32 million during 2013.
- At year-end, the company had $3.0 million drawn on its $6.0 million asset-based Bridge Bank facility and approximately $1.0 million of additional borrowing availability. The facility matures May 2015, is secured by substantially all assets, and requires an asset coverage ratio; TSS reported compliance at year-end. Convertible notes had a net carrying value of approximately $0.86 million, with scheduled principal payments of $0.20 million in 2014 and $0.75 million in 2015.
- Stockholders’ equity was $3.25 million, down from $5.21 million. TSS reported no off-balance-sheet arrangements.
Changes, outlook, and risks
- Management said it expects the systems integration business to be accretive to net income over the next 12 months and believes cost reductions from prior restructuring will continue. It also said cash, expected operating cash flow, and available credit should support operations and capital needs for the next 12 months. These are expectations, not guarantees; the filing provides no formal revenue or earnings guidance.
- Customer concentration increased: three customers represented 72% of 2013 revenue, compared with two representing 45% in 2012. The three largest customers contributed 30%, 29%, and 13% of 2013 revenue.
- Management cited pricing pressure, delayed or deferred customer projects, government spending uncertainty, and competition from larger providers. Other significant risks include cancellable contracts, fixed-price project cost overruns, estimates used in percentage-of-completion accounting, disputed change orders, subcontractor performance, and dependence on cleared and skilled personnel.
- Outstanding project bonds totaled approximately $25.8 million. Open purchase-order commitments were approximately $5.6 million, most expected to be fulfilled in the first half of 2014; future minimum lease payments totaled $2.25 million.
- The company disclosed that it had failed to timely file an acquisition-related Form 8-K/A with required audited historical and pro forma financial statements. It stated that until the required filings are made, it cannot have a registration statement declared effective, limiting public-market debt or equity financing access.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2013 because of material weaknesses involving approval and recording of employee time sheets used in project revenue accounting, and insufficient third-party support for accounting for certain non-standard transactions. The auditor expressed no opinion on internal-control effectiveness.
- The filing’s cover page indicates TSS had not filed all required reports during the preceding 12 months. The common stock traded on OTCQB, was thinly traded, and the company said it did not anticipate paying dividends in the foreseeable future.
Key facts for investors to verify
- Whether revenue and margins stabilize, and whether the acquired integration business achieves management’s expected contribution.
- Customer concentration, renewal and cancellation exposure, project pipeline, and collection of receivables and retainage.
- Cash burn, borrowing-base availability, compliance with credit-facility covenants, and repayment of bank and convertible debt.
- Completion of the overdue acquisition-related filings and remediation of the disclosed control weaknesses.
- Exposure to fixed-price project losses, outstanding bonds, purchase commitments, and any change-order or subcontractor disputes.