TSS, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report; it notes fourth-quarter operating profit but does not provide complete quarterly financial statements in the supplied text.
Business context
TSS provides consulting, design, project management, systems integration, installation and facilities-management services for data centers and other mission-critical facilities. It operates in facilities and systems-integration segments, with all revenue generated in the United States. Management’s strategy is to shift toward higher-margin, recurring facilities-management and integration work rather than relying as heavily on large, lower-margin projects.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $29.487 million | $27.985 million |
| Gross profit / margin | $8.368 million / 28% | $8.561 million / 31% |
| Operating loss | $1.849 million | $2.473 million |
| Net loss | $2.205 million | $2.803 million |
| Loss per share, basic and diluted | $0.14 | $0.19 |
| Cash used in / provided by operations | $1.552 million used | $0.622 million provided |
| Cash and cash equivalents at year-end | $1.132 million | $1.378 million |
Revenue increased 5%, but gross profit declined 2% as lower-margin project-management and equipment-procurement activity grew while higher-margin systems integration weakened. Facilities revenue rose to $23.975 million from $20.354 million; systems-integration revenue declined to $5.512 million from $7.451 million. SG&A fell 9% to $9.651 million, contributing to the narrower operating loss. Management reported fourth-quarter operating profit of approximately $0.1 million; full-year results remained loss-making.
At December 31, 2015, total assets were $13.027 million, total liabilities $13.627 million, and stockholders’ equity was a deficit of $0.600 million. Current assets of $9.514 million were below current liabilities of $12.539 million. The company had $2.162 million drawn on its revolving facility and $1.347 million in long-term borrowings, net of discounts. The revolving facility’s $6 million limit was subject to a receivables borrowing base; the company was over-advanced by about $261,000 at year-end and repaid that amount in January 2016.
Material changes, outlook and risks
- Operating cash flow deteriorated from a $0.622 million inflow to a $1.552 million outflow, primarily reflecting working-capital needs tied to a large project and increased receivables.
- Three customers generated 65% of 2015 revenue, compared with 60% in 2014. The largest customer, a U.S.-based IT OEM, accounted for 35% of revenue; a U.S.-based data center customer represented 47% of year-end receivables.
- The auditor’s report includes a going-concern explanatory paragraph, citing recurring losses and a net capital deficiency. Management said it expected adequate resources for at least twelve months if its business-plan cash-flow projections were achieved, but stated that additional financing may be needed and was not assured.
- The Bridge Bank revolver was due to mature in May 2016. Management described replacing it as critical to liquidity and said it was evaluating debt and equity financing alternatives; no financing commitment was disclosed.
- Management cited a larger sales pipeline and expected improved 2016 operating results, but provided no numerical guidance. It also highlighted efforts to control costs, expand direct sales and increase higher-margin service revenue.
- Other key exposures include fixed-price contracts (about 85% of revenue), project-cost estimation and change-order collection risk, short-notice contract cancellations, competition, subcontractor performance and limited customer diversification. Outstanding project bonds were approximately $7.3 million.
- Related-party financing included a $945,000, five-year loan bearing 12% interest from an entity affiliated with the board chair, with warrants issued to the lender. A $550,000 convertible note owed to the chief technical officer was amended to defer repayments, and a warrant for 100,000 shares was issued in connection with the amendment.
- No material litigation was reported. The company reported that previously identified internal-control material weaknesses were remediated and that controls were effective at year-end 2015.
Most important facts for investors to verify
- Whether the company renewed or replaced the Bridge Bank facility before its May 2016 maturity, and on what borrowing-base, covenant and collateral terms.
- Whether operating cash flow and working capital improved after the year-end project receivables build, and whether customer collections were achieved.
- Whether the claimed sales-pipeline growth converted into recurring, higher-margin revenue and sustained profitability.
- Exposure to the largest customers, including collection concentration in the data-center customer responsible for 47% of year-end receivables.
- The terms, repayment status and dilution potential of related-party debt and warrants, and the availability and terms of any further financing.
- The filing’s segment table reports 2014 total revenue of $27.895 million, while the consolidated statements report $27.985 million; verify the apparent $90,000 discrepancy.
- The filing checkboxes appear to mark “No” for having filed all required reports during the preceding 12 months and for submitting required Interactive Data Files; verify the company’s filing-compliance status.