TSS, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. TSS provides mission-critical facilities services and systems integration, primarily in the U.S. In September, it sold part of its Maryland facilities-maintenance business.
Financial performance
Amounts below are in millions except per-share data; comparisons are with the same 2015 period.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.416 | $6.292 | $20.120 | $19.411 |
| Gross profit | $1.461 | $2.000 | $4.934 | $5.846 |
| Gross margin | 27% | 32% | 25% | 30% |
| Operating income (loss) | $0.240 | $(0.527) | $(0.914) | $(1.988) |
| Net income (loss) | $0.165 | $(0.601) | $(1.171) | $(2.221) |
| Basic and diluted EPS | $0.01 | $(0.04) | $(0.07) | $(0.14) |
- Q3 revenue fell about 14% year over year, while nine-month revenue rose about 4%. Nine-month facilities revenue increased, but systems-integration revenue declined.
- Margins weakened: management attributed this to a mix shift toward lower-margin project management, equipment procurement and subcontractor costs, as well as lower systems-integration facility utilization. SG&A declined 17% in Q3 and 15% year to date.
- Q3 net income included a $910,000 gain on the business sale. Excluding that gain, reported operating income would have been an operating loss of approximately $670,000.
- Nine-month operating cash flow was $1.312 million, versus cash used of $1.094 million in 2015. The filing attributes the improvement chiefly to lower receivables and working-capital needs and reduced losses. Investing activities provided $304,000; financing activities used $1.770 million, including repayment of the $2.150 million bank credit line.
Financial position and liquidity
- At September 30, cash was $978,000, total assets $8.064 million, and total liabilities $9.668 million. Stockholders’ deficit was $1.604 million.
- Current assets of $4.786 million were below current liabilities of $8.795 million, a roughly $4.009 million working-capital deficit.
- Borrowings included $1.153 million of long-term debt, including current maturities, and $605,000 outstanding under receivables financing. The factoring arrangement is full-recourse, advances 80% of eligible receivables at a prime-plus-7% rate, and purchases are at RTS’s discretion without a committed maximum.
- Management said it expected available resources to support operations for at least 12 months if cash-flow projections are achieved, but identified substantial uncertainty related to operating losses, the working-capital position and stockholders’ deficit. It is evaluating debt and equity financing; availability is not assured. The statements are prepared on a going-concern basis and include no adjustments for a failure to continue as a going concern.
Material developments, outlook and risks
- The September 30 sale had a stated purchase price of $950,000; the buyer assumed $214,000 of liabilities. TSS received $546,000 at closing and placed $190,000 in escrow pending customer-contract assignments. After $40,000 of transaction expenses, it recorded a $910,000 gain. The disposition was not classified as discontinued operations.
- TSS says it has no formal numeric guidance. It plans to focus on systems integration and modular data-center build and maintenance work, and cited possible further cost reductions if needed. Management warned that cost reductions could impair its services and that additional financing may dilute shareholders or impose restrictions.
- Customer concentration is material: one U.S. IT OEM generated 37% of Q3 revenue and 35% year-to-date revenue. The company also depends on large, timing-sensitive projects that can increase working-capital needs and cause revenue volatility. Fixed-price work carries cost-estimation and margin risk.
- Debt includes related-party notes: $325,000 principal owed to a director/CTO and $945,000 principal owed to an entity affiliated with the board chairman. The filing also discloses related-party facility leases.
- Management reported effective disclosure controls and internal control over financial reporting. It reported no material litigation and no off-balance-sheet arrangements.
Important facts to verify
- Reconcile the MD&A’s revenue discussion with the financial statements: the narrative describes Q3 revenue growth and cites figures inconsistent with the statements, which show Q3 revenue of $5.416 million versus $6.292 million; it also describes nine-month growth as 12%, versus approximately 4% in the statements.
- Confirm release conditions and final working-capital/customer-contract adjustments for the $190,000 sale escrow, and whether the sale proceeds provide durable liquidity.
- Monitor receivables-factoring availability, fees and recourse exposure, and the schedule for related-party debt repayments.
- Assess the assumptions behind management’s 12-month liquidity expectation, the feasibility of additional financing or cost reductions, and customer/project concentration.