TSS, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. TSS provides planning, design, construction, maintenance and systems-integration services for data centers and other mission-critical facilities. This unaudited report covers the quarter and six months ended June 30, 2015; financial amounts below are in U.S. dollars unless noted.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $5.847 million | $6.302 million | $13.119 million | $13.361 million |
| Gross profit / margin | $1.442 million / 25% | $1.659 million / 26% | $3.846 million / 29% | $3.894 million / 29% |
| Operating loss | $1.131 million | $1.230 million | $1.461 million | $2.057 million |
| Net loss | $1.218 million | $1.302 million | $1.620 million | $2.194 million |
| Loss per share | $0.08 | $0.09 | $0.10 | $0.15 |
- Cash flow: For the first six months, operating activities used $1.074 million, investing activities used $199,000, and financing activities provided $811,000. Cash declined $462,000 to $916,000.
- Liquidity: At June 30, current assets were $5.896 million and current liabilities were $8.946 million (an approximate 0.66 current ratio). The company reported about $500,000 available under its borrowing-base-limited credit facility.
- Debt and equity: The balance sheet reported $1.187 million drawn on the bank credit facility, $600,000 of current convertible notes, and $791,000 of non-current notes payable, net of discount. Total liabilities were $9.744 million; stockholders’ equity was a $255,000 deficit.
Changes versus comparable periods
- Q2 revenue fell 7% year over year, primarily because systems-integration revenue declined $740,000 (43%) amid a short-term demand decrease from the largest channel partner. Facilities construction and maintenance revenue increased $286,000 (6%).
- Six-month revenue declined 2%, mainly reflecting $1.2 million less construction revenue after completion of a large project in 2014, partly offset by growth in design and systems integration.
- Q2 gross margin declined to 25% from 26% a year earlier and 33% in Q1 2015, reflecting weaker higher-margin integration activity and lower facility utilization. Six-month gross margin was unchanged at 29%.
- SG&A expense was $2.425 million in Q2, down from $2.771 million; for the six months it was $5.029 million versus $5.710 million. Management attributed the reduction mainly to lower headcount and professional fees. Operating and net losses improved year over year, but the company remained loss-making.
- By segment, Q2 facilities construction and maintenance revenue was $4.849 million, while systems integration revenue was $998,000. Segment operating income was $812,000 and loss was $202,000, respectively; consolidated results also included $1.741 million of loss from other activities.
Outlook, risks and notable items
- Going concern: Management stated that operating losses, declining revenue, a declining current ratio and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern. The statements include no adjustments that might result from an inability to continue. TSS said it continues to seek funding and may need further cost reductions; no financing terms or amounts had been agreed.
- Borrowing and related parties: In February 2015, TSS borrowed $945,000 under a five-year, 12% interest-only term loan from an entity affiliated with its board chairman. 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. TSS also had $600,000 of convertible notes payable to a director and leased a facility from an entity partly owned by a director.
- Customer and project concentration: The largest U.S. IT OEM accounted for 40% of Q2 revenue and 47% of six-month revenue. The company warns that loss or reduced business from major customers, or timing shifts in large construction projects, could materially affect revenue, working capital and liquidity.
- Financing risk: The Bridge Bank facility had a May 2016 maturity, and TSS was in compliance with covenants at June 30, 2015. Additional borrowing or equity financing may be unavailable or dilutive; failure to obtain funding could require reduced or discontinued business activities or asset sales.
- Controls: Management concluded disclosure controls were not effective at June 30, 2015 due to material weaknesses involving review of revenue support, journal entries, period cut-off, reconciliations and accrued expenses/accounts payable. Remediation work was underway but had not yet been fully tested.
- Guidance and contingencies: The filing provides no numerical earnings or revenue guidance. Management discussed possible further overhead reductions and financing alternatives. TSS reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company can secure additional financing and maintain adequate liquidity, given its going-concern warning, cash balance and operating cash use.
- Whether revenue and utilization recover in systems integration and higher-margin services, and whether large-project timing drives further volatility.
- How customer concentration and the status of the largest channel partner affect future orders and collections.
- The terms, repayment priority and potential dilution associated with related-party debt and warrants, and any additional financing raised.
- Whether management’s remediation of the disclosed internal-control material weaknesses is completed and tested effectively.