TSS, Inc. — Q2 2017 Form 10-Q
Business and period: TSS provides data-center facilities services and IT systems integration. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are to the corresponding 2016 periods unless noted. All figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $4.198 | $7.029 | $8.587 | $14.704 |
| Gross profit | $1.754 | $2.168 | $3.613 | $3.473 |
| Gross margin | 42% | 31% | 42% | 24% |
| Operating income (loss) | $0.074 | $(0.060) | $0.373 | $(1.154) |
| Net income (loss) | $(0.024) | $(0.169) | $0.229 | $(1.336) |
| Basic and diluted EPS | $(0.00) | $(0.01) | $0.01 | $(0.09) |
Q2 SG&A was $1.555 million, down 25%; depreciation and amortization was $0.125 million. Net interest expense was $0.074 million. First-half results included a $0.321 million gain on sale of a business component; without that item, reported first-half operating income would have been lower.
Cash flow and liquidity: First-half operating cash flow was negative $0.756 million, compared with positive $1.547 million in 2016. Investing activities provided $0.234 million, including $0.314 million of sale proceeds; financing used $0.604 million. Cash declined to $1.026 million from $2.152 million at year-end 2016. At June 30, current assets were $3.026 million versus current liabilities of $6.412 million, and stockholders’ deficit was $1.166 million.
At June 30, long-term borrowings were $0.945 million net of discounts, including $0.100 million current; receivables-factoring borrowings were $0.284 million. The factoring facility advances 80% of eligible receivables at a prime-plus-7% rate, is subject to RTS’s discretion, and is full recourse.
Material changes and management commentary
- Revenue fell 40% in Q2 and 42% in the first half. Facilities revenue declined as TSS reduced design, project management, construction-related and equipment-procurement work; systems integration revenue fell 17% in Q2 but rose 25% for the first half.
- Management attributed improved gross margins and operating results to a more favorable mix of higher-margin maintenance and integration work, lower subcontractor/procurement costs, and reduced overhead after outsourcing certain work, reducing headcount and closing the Maryland facility.
- In January 2017, TSS sold a customer contract and related assets for $350,000; after assumed liabilities and transaction costs, it recorded a $321,000 gain. The buyer may owe earn-out payments if contract revenue exceeds specified thresholds.
- Management expects quarterly revenue to remain below historical levels for the rest of 2017 as the company focuses on facilities maintenance and systems integration. It expects the narrower focus to reduce revenue and working-capital volatility and support profitability, but maintaining margins depends on service mix, pricing, efficiency and utilization.
- The company disclosed substantial doubt about its ability to continue as a going concern based on its history of losses, declining current ratio and stockholders’ deficit. Management nevertheless concluded projected resources were adequate for at least the next 12 months, conditional on meeting forecasts and managing costs. The filing warns that shortfalls could require further cost reductions, additional financing or asset/business sales.
Subsequent financing and risks
On July 19, 2017, TSS amended and extended its related-party MHW loan, extending maturity to July 19, 2022, and raising the maximum principal to $2.5 million for up to 60 days and $2 million thereafter. The 12% interest rate is split between 6% cash interest and 6% payment-in-kind. TSS also borrowed an additional $650,000 from MHW Partners on similar terms. The loans are secured by substantially all borrower assets, include covenants and prepayment fees, and were accompanied by warrants. The lender relationships involve company directors, including the board chairman; the filing describes related warrant-linked fees.
Key risks include dependence on a major U.S. IT OEM, which generated 63% of first-half revenue; competitive pressure; reliance on a small number of large customers; and cost overruns or estimation errors on fixed-price contracts. TSS reported no material litigation and no off-balance-sheet arrangements. Management said disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor facts to verify
- Whether revenue and cash flow meet management’s projections and support its going-concern assessment.
- Whether customer concentration, especially the major OEM relationship, changes and whether receivables are collected as expected.
- Actual borrowing, cash-interest and payment-in-kind costs under the July related-party financing, including the effect of warrants, security interests and covenants.
- Whether improved margins persist as lower-margin project work winds down, and whether integration and maintenance operations achieve adequate utilization.
- The eventual impact of adopting the new revenue-recognition standard; management was still assessing it and expected modified-retrospective adoption.