TSS, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; comparisons are with the three and nine months ended September 30, 2017 unless noted. Amounts are in thousands of dollars except per-share data.
Business context
TSS provides data-center and mission-critical facility services, including design, deployment, maintenance, and systems integration. It reports two segments: Facilities and Systems Integration. Revenue is generated in the United States. The company identifies a large U.S. IT original equipment manufacturer as a key customer.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6,371 | $4,898 | $16,587 | $13,485 |
| Gross profit | $2,516 | $2,080 | $6,447 | $5,693 |
| Gross margin | 39% | 42% | 39% | 42% |
| Operating income | $771 | $393 | $1,403 | $766 |
| Net income | $652 | $298 | $1,050 | $527 |
| Diluted earnings per share | $0.03 | $0.02 | $0.05 | $0.03 |
Quarterly revenue rose 30%; nine-month revenue rose 23%. Facilities revenue was $4,250 for the quarter and $10,796 year to date; Systems Integration revenue was $2,121 and $5,791, respectively. Management attributed growth primarily to increased modular data-center deployments, refresh activity, and integration work. Lower Systems Integration and modular deployment profitability reduced gross margin compared with 2017. Nine-month 2017 operating income included a $321 gain on a business-component sale; despite that prior-year gain, operating income increased in 2018.
Cash flow: Operating activities provided $1,113 in the first nine months of 2018, versus $1,017 used in 2017. The improvement reflected higher profitability and advance maintenance-contract receipts, partly offset by increased receivables. Investing activities used $196, mainly for capital expenditures; financing activities provided $1 net. Cash increased to $3,186 from $2,268 at December 31, 2017.
Balance sheet and liquidity: At September 30, 2018, total assets were $9,311, total liabilities $8,388, and stockholders’ equity $923, compared with a $305 stockholders’ deficit at year-end 2017. Current assets were $6,417 and current liabilities $6,418 (reported in rounded thousands); management said the working-capital deficit was eliminated during the quarter, while warning it may recur. Long-term borrowings were $1,795, with no current portion reported. The notes carry 12% annual interest, half payable in cash and half in kind, and are secured by substantially all company assets.
Material changes and management commentary
- Management reported nine consecutive quarters of operating profitability and improved liquidity, but quarterly revenue and operating results have fluctuated materially.
- Management expects available cash and projected operating cash flows to support operations for at least 12 months if the company meets its business-plan projections. The filing nevertheless states that the history of losses, negative working capital, and prior stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern; management says the uncertainty may be alleviated if results continue improving.
- The largest customer accounted for 66% of Q3 revenue and 69% of nine-month revenue. Management warns that loss of, or reduced business from, this customer could materially harm results. A second customer represented 13% of Q3 revenue.
- Debt includes related-party notes payable to entities affiliated with the board chairman. The arrangements include warrants with low exercise prices, creating potential dilution; the filing describes the related-party relationship and associated fees.
- The company adopted the new revenue-recognition standard on January 1, 2018, with no material reported impact. Deferred revenue included $3,330 for maintenance obligations expected to be recognized within a year and $126 for other services expected within one to two years.
- The company expects adoption of the new lease standard to add approximately $2–$2.5 million of lease-related assets and liabilities to the balance sheet; it did not anticipate a material effect on operating results.
Outlook, risks, and other matters
No specific revenue or earnings guidance is provided. Management’s liquidity outlook depends on revenue, cost, and working-capital assumptions; shortfalls could require further cost reductions or additional financing, which may not be available on acceptable terms. Cost reductions could impair service offerings, and new debt or equity could increase debt burdens or dilute shareholders. Fixed-price projects also expose the company to cost overruns, labor and hiring challenges, and lower-than-expected productivity. The filing reports no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2018.
Important facts for investors to verify
- Whether operating cash flow and customer advances remain sufficient to fund working capital, especially given the company’s large receivable increase.
- Whether customer concentration, particularly the major OEM relationship, changes materially.
- Whether gross margins recover as Systems Integration and modular deployment volumes and labor mix change.
- The terms, related-party nature, security, interest burden, and potential dilution associated with the outstanding debt and warrants.
- Whether the company sustains profitability and the filing’s conditional 12-month liquidity outlook, including any subsequent financing or going-concern updates.