TSS, Inc. — Q3 2014 Form 10-Q
Business context and period: TSS provides planning, design, construction management, maintenance and systems-integration services for mission-critical facilities and IT infrastructure, primarily in the U.S. This unaudited report covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $6.213 million | $10.292 million | $19.575 million | $31.363 million |
| Gross profit / margin | $2.162 million / 35% | $2.210 million / 21% | $6.057 million / 31% | $6.941 million / 22% |
| Operating loss | $0.293 million | $0.950 million | $2.350 million | $1.859 million |
| Net loss | $0.366 million | $1.019 million | $2.560 million | $2.007 million |
| Loss per share | $0.02 | $0.07 | $0.17 | $0.14 |
Cash flow: Operating cash use was $1.616 million in the first nine months of 2014, versus $4.917 million in 2013. Investing cash use was $0.364 million, primarily capital expenditures; financing cash use was $0.404 million, including repayment of notes and credit-facility borrowings. Cash declined $2.384 million to $0.907 million. The company reported $45,000 cash taxes paid and $162,000 cash interest paid.
Balance sheet and debt: At September 30, 2014, cash was $0.907 million, current assets were $8.552 million, current liabilities were $10.530 million, total assets were $12.159 million, total liabilities were $11.107 million, and equity was $1.052 million. Credit-facility borrowings were $2.771 million; net convertible notes payable were $0.733 million, including $0.158 million current. The notes are payable to a director and CTO, bear 4% interest, and were rescheduled with the remaining balance due January 2016. The company had $0.526 million of additional borrowing availability under its borrowing base at quarter-end.
Changes, outlook and risks
- Quarterly revenue fell 40%; management attributed the decline mainly to $4.8 million less design and construction revenue, partly offset by higher systems-integration revenue. Nine-month revenue fell 38%, reflecting no repeat of a $4.9 million battery sale and lower construction revenue, partly offset by systems integration.
- Gross margin improved as the business mix shifted toward higher-margin maintenance and systems integration and away from lower-margin construction and battery revenue. Q3 SG&A declined 24% year over year, mainly from headcount reductions and lower professional fees.
- The largest U.S. IT OEM represented 50% of Q3 revenue and 41% of nine-month revenue; it accounted for 69% of receivables at September 30. Management identifies dependence on this customer and the timing and working-capital demands of large projects as significant risks.
- Management reported improved margins and lower losses in Q3, including profitability in September. It stated that projected cash flows and available liquidity were expected to support operations for at least 12 months, but that assessment depends on revenue, cost and working-capital estimates. The company continued evaluating debt, convertible-debt and equity financing; no terms or amount had been agreed. No formal earnings guidance was provided.
- After quarter-end, the company entered a customer receivables financing program, accelerating approximately $3.1 million of cash receipts, and modified its bank facility to accommodate the arrangement. Management said this should improve working capital and liquidity. The Bridge Bank facility, secured by substantially all assets, runs through May 2016.
- The filing highlights operating losses, cash use, declining revenue and liquidity as going-concern uncertainties, while concluding that the company had adequate resources to continue. Financing may not be available on acceptable terms; equity financing could dilute shareholders, and additional debt could constrain operations. Fixed-price contracts also expose the company to cost-estimation and execution risk.
- Disclosure controls were not effective at September 30 because of material weaknesses in internal controls over labor-cost recording for percentage-of-completion revenue and accounting for non-standard transactions. The company reported timekeeping-control remediation efforts, but said testing remained necessary.
- No material litigation or off-balance-sheet arrangements were reported. The company stated that it was in compliance with credit-facility covenants at quarter-end.
Key facts for investors to verify
- Whether the improvement in gross margin and September profitability is sustained, particularly as revenue and project mix change.
- Cash collection, liquidity and borrowing-base availability following the customer receivables program and the exclusion of that customer’s receivables from eligible collateral.
- Progress and terms, if any, for additional financing, and the effect of the director’s note repayment schedule on liquidity.
- Revenue concentration in the IT OEM and exposure to large, volatile construction projects.
- Whether the disclosed material weaknesses are fully remediated and controls are shown to operate effectively.