TSS, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparison is with fiscal 2015. Amounts are in U.S. dollars. TSS provides data-center and mission-critical facility services, including facilities design, project management, maintenance, and IT systems integration.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $27.373 million | $29.487 million |
| Gross profit | $7.208 million | $8.368 million |
| Gross margin | 26% | 28% |
| Operating loss | $0.633 million | $1.849 million |
| Net loss | $1.023 million | $2.205 million |
| Loss per share, basic | $0.07 | $0.14 |
| Cash from (used in) operations | $2.232 million | $(1.552) million |
| Cash and cash equivalents at year-end | $2.152 million | $1.132 million |
Revenue fell 7%. Facilities services revenue declined $2.224 million to $21.751 million, while systems integration revenue rose $0.110 million to $5.622 million. The decline in gross profit reflected lower revenue and underutilized fixed staffing and overhead in facilities services. SG&A decreased 16% to $8.149 million. The operating loss includes a $0.910 million gain on the sale of a facilities-maintenance business component; management said results excluding that gain and lower stock compensation were comparable to 2015.
Operating cash flow improved, primarily due to working-capital timing, including a reduction in receivables associated with a large prior-year project. Investing activities provided $0.502 million, including sale proceeds, and financing activities used $1.714 million, principally reflecting repayment of the former bank line. Capital expenditures were $0.290 million.
Balance sheet, debt, and liquidity
At December 31, 2016, current assets were $5.391 million and current liabilities were $9.120 million, a working-capital deficit of approximately $3.729 million. Total liabilities were $10.007 million against total assets of $8.576 million; stockholders’ deficiency was $1.431 million. Cash was $2.152 million.
Reported borrowings included $0.737 million under a receivables factoring arrangement and approximately $1.071 million in net carrying value of notes (including $0.945 million principal due in 2020 to MHW and $0.250 million principal due to director and CTO Gerard Gallagher). The MHW loan bears 12% interest and is secured by substantially all assets; Gallagher’s notes bear 5% interest. The factoring arrangement is full-recourse, advances 80% of eligible receivables at prime plus 7%, and is subject to the factor’s discretion. TSS had no balance on its former bank line at year-end.
Cash from operations and asset sales supported liquidity, but the independent auditor’s report includes an explanatory paragraph expressing substantial doubt about TSS’s ability to continue as a going concern, citing recurring losses, working-capital deficiency, and stockholders’ deficiency. Management said it expected adequate resources for at least 12 months if its cash-flow projections were achieved, while also seeking debt or equity financing; no financing commitment was in place.
Material changes, outlook, and risks
- TSS narrowed its focus toward modular data centers, rack integration, systems integration, and recurring maintenance. It sold a Maryland facilities-maintenance business component in 2016, outsourced certain consulting, engineering, and project-management work, reduced staff, and closed its Maryland facility.
- In January 2017, TSS sold another project-management customer contract. The 2016 and subsequent transactions collectively generated approximately $1.3 million in cash, according to management. The 2017 transaction produced $343,000 in proceeds after assumed liabilities and a $321,000 net gain expected in 2017.
- Management expects lower overhead and improved profitability from the restructuring, but provided no specific formal revenue or earnings guidance. It cautioned that results depend on revenue, costs, working-capital needs, and obtaining financing.
- Three customers were said to represent 64% of 2016 revenue, versus 65% in 2015; the filing also identifies the largest customer at 39%. Customer concentration may rise further in 2017, with the largest customer potentially exceeding 60% of anticipated revenue.
- About 85% of revenue came from fixed-price contracts, exposing margins and liquidity to cost-estimation errors. Many contracts may be cancelled on short notice. Other material risks include competition, project execution and subcontractor performance, technology and customer-spending changes, and access to bonding; outstanding project bonds were approximately $7.3 million.
- TSS reported $36.9 million in net operating loss carryforwards but recorded a full valuation allowance against deferred tax assets. Goodwill and indefinite-lived intangibles were $1.9 million, with no impairment recorded in 2016.
- The filing reports no material litigation and states that disclosure controls and internal control over financial reporting were effective as of year-end. The company’s common stock is quoted on OTCQB, is thinly traded, and no cash dividends are anticipated.
Important facts for investors to verify
- Whether TSS can secure financing or otherwise meet obligations as they fall due, given the auditor’s going-concern warning, negative working capital, and discretionary factoring availability.
- Whether the cost reductions and shift toward modular data-center and recurring service work can produce sustained positive operating cash flow and profitability, apart from one-time sale gains.
- Customer concentration: the narrative says three customers accounted for 64% of revenue, while the customer table lists shares of 39%, 9%, 12%, and 13%, totaling 73%; clarify the apparent inconsistency and customer identities where disclosed.
- The terms, repayment status, collateral, and related-party implications of the MHW and Gallagher notes, and the costs and availability of the RTS factoring arrangement.
- The post-sale revenue base, customer concentration, and liquidity effects of the 2016 and January 2017 business and contract disposals.