TSS, Inc. — Second-Quarter 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. TSS provides design, construction management, integration, and maintenance services for mission-critical facilities and information infrastructure, primarily in the U.S.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.302m | $6.952m | $13.361m | $21.070m |
| Gross profit | $1.659m | $1.971m | $3.894m | $4.730m |
| Gross margin | 26% | 28% | 29% | 22% |
| Operating loss | $(1.230)m | $(0.910)m | $(2.057)m | $(0.910)m |
| Net loss | $(1.302)m | $(0.964)m | $(2.194)m | $(0.988)m |
| Loss per share | $(0.09) | $(0.07) | $(0.15) | $(0.07) |
Q2 revenue fell about 9% year over year; first-half revenue fell about 37%. Management attributed the first-half decline mainly to a nonrecurring $4.9m battery sale and $4.2m lower construction revenue, partly offset by higher systems integration revenue following the 2013 acquisition. First-half gross margin improved as the prior-year period included lower-margin battery and construction work; Q2 margin declined year over year. SG&A was $5.710m for the half, up from $5.528m, while depreciation and amortization also increased.
Cash flow, balance sheet, and debt
- Cash and cash equivalents were $1.393m at June 30, down from $3.291m at year-end 2013; restricted cash was $0.180m. Total assets were $12.745m, total liabilities $11.439m, and stockholders’ equity $1.306m.
- Operating cash use was $2.475m for the first half, versus $2.177m in 2013. Investing cash use was $0.273m; financing provided $0.850m. Cash decreased by $1.898m.
- Credit-facility borrowings were $4.0m at quarter-end under a secured facility with a stated $6m maximum, subject to the borrowing base. The borrowing base supported only about $2.7m at June 30, leaving the facility over-advanced by approximately $1.3m and with no availability then. The asset-coverage ratio was 1.2:1 versus a required 1.5:1.
- In July, TSS repaid the over-advance and received a waiver of the June covenant breach; it reported regaining compliance. The facility was extended to May 2016. Convertible notes payable to a director totaled $0.8m before the unamortized discount (reported carrying value: $0.742m); $0.150m of principal was repaid during the first half.
Outlook, risks, and other notable matters
No specific revenue or earnings guidance was provided. Management said it believed resources were adequate to continue as a going concern for at least the next 12 months, assuming revenue and cost projections hold and alternative funding sources remain accessible. The filing emphasizes uncertainty: operating losses, cash use, declining revenue, limited borrowing capacity, and working-capital needs could require additional financing or cost reductions; financing may be unavailable or dilutive.
- A single U.S. IT OEM accounted for 48% of Q2 revenue and 41% of first-half revenue, and 66% of receivables at June 30. Management cited customer concentration and the volatility and working-capital demands of large construction projects as risks.
- The company reported a history of losses and evaluated goodwill and intangible assets for impairment after missing its Q2 forecast and breaching a credit covenant; it recorded no additional impairment.
- Disclosure controls were not effective at June 30 because of material weaknesses in internal controls, including job-labor cost recognition and accounting for nonstandard transactions. Management expected to complete an automated time-tracking system by the end of Q3 2014 to address one weakness.
- The company reported no material litigation and no off-balance-sheet arrangements. It was evaluating the impact of the new revenue-recognition standard, effective for its fiscal years beginning after December 15, 2016.
Important facts for investors to verify
- Reconcile the Q2 revenue decline: the financial statements show a $0.650m decrease, while MD&A describes a $0.4m decrease (also characterized as 10%).
- Confirm the post-quarter repayment, covenant waiver, and available borrowing capacity after the facility’s borrowing-base limits.
- Assess cash forecasts, customer collections, working-capital requirements, and the feasibility of alternative financing given the going-concern and liquidity disclosures.
- Track remediation and testing of the disclosed internal-control material weaknesses.
- Monitor concentration in the IT OEM customer and the mix, margins, and timing of construction versus integration and maintenance work.