TSS, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. TSS provides data-center and mission-critical facility services, including facilities work and systems integration. All revenue was generated in the U.S.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $4.389 million | $7.675 million |
| Gross profit / margin | $1.859 million / 42% | $1.305 million / 17% |
| Operating income (loss) | $0.300 million | ($1.094 million) |
| Net income (loss) | $0.254 million | ($1.167 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.07) |
| Cash from (used in) operations | ($0.684 million) | $0.694 million |
Revenue declined 43% year over year. Facilities revenue fell to $2.488 million from $6.733 million, while systems integration revenue rose to $1.901 million from $0.942 million. Selling, general and administrative expense decreased 23% to $1.741 million. The quarter’s results included a $0.321 million gain on sale of a business component.
Cash and cash equivalents were $1.295 million at March 31, down from $2.152 million at December 31, 2016. Operating cash use reflected, in part, a $1.619 million reduction in accounts payable and accrued expenses. Investing activities provided $0.281 million, including sale proceeds, while financing activities used $0.454 million.
At quarter-end, total assets were $6.482 million and total liabilities were $7.650 million, leaving a stockholders’ deficit of $1.168 million. Current assets of $3.319 million were below current liabilities of $6.799 million. Borrowings, net, were $0.933 million, and factoring-agreement borrowings were $0.434 million. The factoring arrangement is discretionary, full-recourse, and has no committed maximum amount.
Material changes and unusual items
- The company sold assets and liabilities tied to a specific project-management customer contract on January 31 for a stated $350,000 purchase price. After assumed net liabilities and transaction costs, it received approximately $314,000 in cash and recorded a net gain of approximately $321,000.
- Management attributed higher gross margin to a more favorable mix, including less lower-margin project management and equipment procurement and more maintenance and systems integration work.
- The company repaid $150,000 of convertible-note principal to director and founder Gerard Gallagher during the quarter. The remaining $100,000 principal balance was due July 1, 2017. It also has a $945,000 principal loan from an entity affiliated with its chairman, bearing 12% interest and maturing in February 2020.
- There were no material changes to critical accounting policies. The company was evaluating the impact of the forthcoming revenue-recognition and lease-accounting standards.
Outlook, risks and contingencies
Management expected quarterly revenue to remain below historical levels for the rest of 2017 as TSS focused on facilities maintenance and systems integration and reduced exposure to large, lower-margin, working-capital-intensive projects. Management said it expected adequate resources for at least 12 months if cash-flow projections were met, but noted substantial doubt about going concern arising from operating-loss history, a declining current ratio and stockholders’ deficit. The company was evaluating debt and equity financing alternatives; availability was not assured.
Key risks include revenue or cost performance falling short of forecasts, working-capital requirements exceeding expectations, dependence on large customers, and execution and cost-estimation risks on fixed-price contracts. One U.S.-based IT OEM accounted for 63% of Q1 revenue, compared with 22% a year earlier. Management stated disclosure controls and internal control over financial reporting were effective at quarter-end. The filing reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether operating cash flow and liquidity improve, particularly given the working-capital deficit and discretionary nature of factoring.
- Whether profitability persists after excluding the $321,000 asset-sale gain and as revenue shifts toward maintenance and integration.
- Whether customer concentration changes and the large IT OEM relationship remains productive.
- How the $100,000 related-party convertible note due July 1, 2017 was repaid or refinanced, and whether additional funding was obtained.
- Whether actual 2017 revenue, costs and cash needs aligned with management’s projections and going-concern assumptions.