TSS, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. TSS provides planning, design, construction, integration, operations and maintenance services for mission-critical facilities and information infrastructure. The company acquired arvato digital services’ data center systems-integration business in May 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $10.29 million | $9.27 million | $31.36 million | $39.12 million |
| Gross profit | $2.21 million | $2.63 million | $6.94 million | $7.02 million |
| Gross margin | 21.5% | 28.4% | 22.1% | 17.9% |
| Operating loss | $(0.95) million | $(0.08) million | $(1.86) million | $(3.51) million |
| Net loss | $(1.02) million | $(0.27) million | $(2.01) million | $(3.79) million |
| Loss per share | $(0.07) | $(0.02) | $(0.14) | $(0.27) |
- Revenue and margins: Q3 revenue rose about 11%, principally from $1.1 million of acquired systems-integration revenue; gross margin fell as that business carried lower margins and facilities-management revenue declined. Nine-month revenue fell about 20%, mainly because construction-management revenue was $13.1 million lower after a large prior-year project. Nine-month margin improved as the prior-year mix included that lower-margin project.
- Expenses and unusual items: Q3 SG&A increased to $3.16 million from $2.71 million, reflecting acquired-business costs, facility and functional-role consolidation, and acquisition costs. Nine-month SG&A was $8.80 million versus $8.18 million. The prior-year period included $0.28 million of restructuring charges and $2.07 million of goodwill impairment; neither recurred in 2013. The acquired business contributed $1.77 million revenue and $0.51 million net loss for the nine-month period, including pre-acquisition pro forma results as presented in the acquisition note.
- Cash flow: Operating cash outflow was $4.92 million for the first nine months, versus $0.84 million a year earlier. Increased receivables and inventory were significant uses of cash. Investing cash outflow was $1.72 million, including $1.47 million for the acquisition. Financing provided $1.62 million, including $3.0 million of credit-facility proceeds and $1.18 million of convertible-note repayments.
- Liquidity and debt: September 30 cash was $0.59 million, down from $5.61 million at year-end; restricted cash was $0.54 million. Current assets were $14.09 million and current liabilities $13.07 million. Debt included $3.0 million drawn on the revolving facility and $0.87 million of convertible notes, net of discount. The facility had $2.10 million of additional availability, subject to its borrowing base; the company reported a 2.42:1 asset-coverage ratio against a 1.5:1 minimum.
- Equity: Stockholders’ equity declined to $3.93 million from $5.21 million at year-end, principally reflecting the nine-month net loss. Shares outstanding were 14,572,002 as of November 7, 2013.
Outlook, risks and contingencies
- Management said cash, expected operating cash flows and credit-facility availability should fund operations and capital needs for the next 12 months; this is an expectation, not a quantified forecast.
- Management cited economic uncertainty, delayed or deferred customer projects, price pressure from larger competitors, possible margin erosion, and reliance on customers’ ability to win work under master service agreements. It said further cost reductions, potentially including personnel, might be required if contract volume declines.
- The company disclosed that it had failed to timely file required audited historical and pro forma financial statements for the systems-integration acquisition. Until those statements are filed, it said it could not obtain effectiveness of a registration statement and therefore could not raise capital through public debt or equity offerings.
- The filing cover marks “No” for having filed all required Exchange Act reports during the prior 12 months. Management nevertheless concluded disclosure controls were effective as of September 30, 2013 and reported no material change in internal control over financial reporting.
- The May 2013 acquisition’s purchase-price allocation was preliminary and subject to refinement. The filing reported no material pending litigation and no off-balance-sheet arrangements.
- The filing contains conflicting credit-facility maturity dates: the note to the financial statements says May 21, 2015, while MD&A says May 21, 2014. The credit agreement description in the note also identifies May 21, 2015.
Important facts for investors to verify
- Whether and when the required audited acquisition and pro forma financial statements were filed, and whether the registration-statement restriction was subsequently resolved.
- The revolving facility’s actual maturity date, availability under its borrowing base, covenant compliance, and the consequences if the facility cannot be renewed or replaced.
- Whether receivables collection and inventory needs improve after the substantial operating cash outflow, and whether liquidity remains adequate.
- The final acquisition purchase-price allocation and the acquired business’s performance, integration costs and contribution to margins.
- Customer and project concentration, continued pricing pressure, and whether management’s expected 12-month liquidity is supported by actual operating cash flows.