TSS, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. TSS provides data-center and mission-critical facility services, including facilities maintenance, systems integration, installation, and project management. All revenue was generated in the U.S. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.898 | $5.416 | $13.485 | $20.120 |
| Gross profit / margin | $2.080 / 42% | $1.461 / 27% | $5.693 / 42% | $4.934 / 24% |
| Operating income (loss) | $0.393 | $0.240 | $0.766 | $(0.914) |
| Net income (loss) | $0.298 | $0.165 | $0.527 | $(1.171) |
| Basic and diluted EPS | $0.02 | $0.01 | $0.03 | $(0.07) |
- Q3 revenue declined 10% year over year, while gross profit increased about 42%; higher-margin revenue mix and lower operating expenses supported improved operating income.
- Nine-month revenue declined 33%, mainly reflecting reduced facilities/project-management activity and business sales. Systems integration revenue grew 43% to $5.019 million for the nine months; facilities revenue fell 49% to $8.466 million.
- SG&A fell 20% in Q3 and 23% for the nine months. The nine-month results included a $0.321 million gain on the January 2017 sale of a customer contract; no such gain was recorded in Q3.
- Operating cash flow was negative $1.017 million for the nine months, versus positive $1.312 million in 2016. Cash decreased from $2.152 million at year-end 2016 to $0.970 million at September 30, 2017.
- At September 30, current assets were $3.578 million and current liabilities $5.907 million, a working-capital deficit of $2.329 million and current ratio of approximately 0.61. Stockholders’ equity was negative $0.740 million.
- Long-term borrowings had a $1.618 million principal balance, reported net of discount at $1.411 million. The company had no balance under its receivables-factoring agreement at quarter-end.
Material developments, outlook and risks
- Management shifted toward facilities maintenance and systems integration, scaling back lower-margin design, procurement, and project-management work and outsourcing some functions. Management said this reduced overhead and working-capital volatility. Quarterly revenue was expected to remain below historical levels over the rest of 2017; no numeric forecast was provided.
- In July, TSS borrowed $0.650 million from entities affiliated with its board chair and extended existing related-party debt to 2022. The notes bear 12% interest, half payable in cash and half in kind, are secured by substantially all assets, and carry warrants. The chair is affiliated with the lenders.
- After quarter-end, TSS obtained an additional $0.400 million in loans from two new lenders, due in 2022, and issued warrants. These subsequent loans did not bear stated interest, but their warrant-related discounts will be amortized to interest expense.
- The factoring facility is discretionary, not a committed credit line; advances are subject to RTS approval and fees based on prime plus 7%. TSS may need further financing or cost reductions if revenue, costs, or working-capital needs miss expectations.
- The filing states that annual operating losses, a declining current ratio, and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern. Management nevertheless concluded that it had adequate resources for the next 12 months, assuming its business plan and cash-flow projections are achieved. The financial statements include no adjustments for a failure to continue as a going concern.
- A single U.S.-based IT OEM accounted for 65% of Q3 revenue and 63% of nine-month revenue, and 45% of receivables at September 30. Management also cited competition from larger companies and risks that fixed-price contract costs could exceed estimates.
- Management reported effective disclosure controls and no material litigation known to it. The filing provided no specific earnings or margin guidance.
Important facts for investors to verify
- Whether operating cash flow and liquidity improve after the reduced project-management activity and the October financing.
- Whether growth in systems integration and maintenance can offset lower facilities revenue while preserving the reported gross-margin improvement.
- The terms, security, warrants, related-party implications, and cash-interest burden of the debt, including the October loans.
- How dependent revenue and collections remain on the large IT OEM, and whether customer concentration changes.
- Whether management’s going-concern assessment remains supportable if revenue or cash-flow projections are not met.