TSS, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. TSS provides mission-critical facilities and data-center services, including construction and maintenance and systems integration. All revenue was from the U.S.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $7.272 million | $7.059 million, up 3% |
| Gross profit / margin | $2.404 million / 33% | $2.235 million / 32% |
| Operating loss | $330,000 | $828,000 |
| Net loss | $402,000 | $892,000 |
| Basic and diluted loss per share | $0.03 | $0.06 |
| Cash used in operating activities | $1.347 million | $1.951 million |
Revenue growth reflected stronger facilities maintenance and systems integration, including modular data-center deployments, partially offset by a $1.6 million decline in construction-management revenue. Systems integration revenue increased to $2.466 million from $1.572 million; facilities construction and maintenance revenue declined to $4.806 million from $5.487 million. Gross margin improved as the mix shifted toward higher-margin services and integration-facility utilization increased. SG&A fell 10% to $2.604 million, primarily on lower professional fees and temporary labor.
At March 31, cash was $708,000, down from $1.378 million at year-end. Current assets were $5.774 million and current liabilities $7.807 million, a working-capital deficit of $2.033 million. Total assets were $9.422 million; total liabilities were $8.606 million. Reported debt included $1.079 million drawn on the revolving credit facility, $663,000 of current convertible notes (net), and $783,000 of non-current notes (net). The filing reports $72,000 of net interest expense.
Financing activities provided $769,000, including $945,000 borrowed under a new term loan, partly offset by repayments on the convertible notes and revolving facility. Capital expenditures were $92,000. The $6 million Bridge Bank facility had a May 2016 maturity; only approximately $100,000 was available under its borrowing-base limit, and the company reported covenant compliance.
Material changes, outlook, and risks
- Management reported improved results compared with Q1 2014, but revenue was 14% below Q4 2014, mainly because of lower construction-management activity. No quantitative earnings or revenue guidance was provided.
- Management stated that operating losses, declining revenue, and a declining current ratio raise substantial doubt about the company’s ability to continue as a going concern. It was seeking additional financing; availability, amount, and terms were uncertain. The statements contain no adjustments that might result from failure to continue as a going concern.
- In February 2015, TSS borrowed $945,000 under a five-year, 12% interest-only loan from an entity affiliated with the board chair. The loan is secured by substantially all assets and subordinated to Bridge Bank debt. The lender also received warrants for up to 1,115,827 shares at tiered exercise prices of $0.50, $1.00, and $1.30.
- The company depends on a large U.S. IT OEM, which accounted for 56% of Q1 revenue, versus 38% a year earlier. Management cited customer concentration, competition, construction-project timing and working-capital demands, and cost-estimation risk on fixed-price contracts. A financing program with the largest customer had accelerated $3.1 million of receivables in 2014.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of material weaknesses in monitoring and review controls, including revenue documentation, journal entries, cut-off procedures, reconciliations, and accrued expenses/accounts payable. Some remediation steps were underway but had not yet been tested.
- The company reported no material litigation and no off-balance-sheet arrangements. Management said it was evaluating potential debt, convertible debt, and equity financing, without agreed terms or assurance of completion.
Important facts for investors to verify
- Whether TSS can obtain additional financing and maintain adequate liquidity, given the going-concern warning, cash use, and limited borrowing availability.
- Whether revenue and margins can be sustained as construction activity fluctuates and the business shifts toward maintenance and systems integration.
- The extent of exposure to the largest customer and the effect of any changes in that relationship or order levels.
- Progress and testing of remediation for the material weaknesses in internal controls.
- Terms, repayment obligations, collateral, and potential dilution associated with the related-party loan and warrants.