TSS, Inc. — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. TSS provides planning, design, construction management, systems integration, installation and facilities-management services for mission-critical infrastructure. Its systems-integration business, acquired in May 2013, contributed to the current-period results.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $7.06 million | $14.12 million |
| Gross profit / margin | $2.24 million / 31.7% | $2.76 million / 19.5% |
| SG&A | $3.06 million | $2.76 million |
| Operating income (loss) | $(0.83) million | $680 |
| Net income (loss) | $(0.89) million | $(0.02) million |
| Basic and diluted loss per share | $(0.06) | $(0.00) |
| Cash flow from operations | $(1.95) million | $(0.83) million |
Cash and cash equivalents were $1.09 million at March 31, down from $3.29 million at December 31, 2013; restricted cash was $0.16 million. Total assets were $13.41 million and total liabilities were $10.92 million. Current assets were $9.79 million versus current liabilities of $10.19 million.
Borrowings under the $6.0 million Bridge Bank revolving facility were $3.0 million, with $0.6 million of additional availability at quarter-end. The facility is secured by substantially all borrower assets, subject to a borrowing base, and matures May 21, 2015. Net convertible notes payable were $0.75 million, including $0.04 million current. The reported asset coverage ratio was 1.9:1 against a 1.5:1 minimum.
Changes and management commentary
- Revenue fell by about $7.06 million year over year. Management attributed the decline mainly to a $4.9 million industrial-battery sale and $3.5 million of deployment-construction projects in Q1 2013 that did not recur; the acquired systems-integration business contributed $1.6 million in Q1 2014.
- Gross profit declined in dollars but margin improved to 31.7%, primarily because lower-margin prior-year projects did not recur, systems integration had higher margins, and recurring service work represented a larger share of revenue.
- SG&A rose by about $0.3 million, including approximately $0.3 million of systems-integration costs and $0.1 million of additional audit fees, partly offset by expense-reduction efforts.
- Management said results were in line with expectations, estimated normalized quarterly SG&A at current revenue levels at approximately $2.5 million, and expected future-quarter gross profit to meet or exceed that level. It believed available cash, facility borrowings and operating cash flow would meet needs for the next 12 months. Before the facility maturity, it planned to consider renewal, replacement financing or additional debt or equity.
Risks, contingencies and unusual items
- Operating cash outflow and the decline in cash highlight liquidity pressure. Management cautioned that project delays, customer losses or reduced customer spending, adverse economic conditions, pricing pressure, and inability to renew or replace the credit facility could harm results and liquidity; expense reductions may not fully offset adverse effects.
- Disclosure controls and procedures were reported ineffective as of March 31, 2014 due to material weaknesses in internal controls. These included controls over labor-cost recognition for percentage-of-completion projects and accounting for non-standard transactions. The company was implementing automated time tracking, targeting completion by Q3 2014, and was identifying remediation for the transaction-accounting weakness.
- An April 8, 2014 credit-facility modification expanded eligible receivables to include certain extended-term receivables and added a monthly maintenance fee of 0.1 percentage points of the daily account balance for the month.
- No material pending litigation was reported. The company reported no off-balance-sheet arrangements and no goodwill or intangible-asset impairment in the quarter. It maintained a full valuation allowance on net deferred tax assets.
- The cover page marks “No” for the combined question about filing all required reports during the preceding 12 months and being subject to those requirements; investors should verify the filing-status disclosure.
Important facts for investors to verify
- Whether the April 8 credit-facility amendment materially changes borrowing availability, costs or covenant compliance, and the company’s plan for the May 2015 maturity.
- Whether operating cash flow and liquidity improve, including collections, contract working capital and access to the revolving facility.
- Whether revenue and gross profit support management’s stated expense expectations amid customer and project timing risks.
- Progress and testing of remediation for both material weaknesses, especially the targeted Q3 2014 time-tracking implementation.
- The cover-page “No” response on required periodic reports and its implications.