TSS, Inc. — 2014 Form 10-K Summary
Business context and reporting period
TSS provides planning, design, construction management, maintenance and systems integration services for data centers and other mission-critical facilities. The filing covers the fiscal year ended December 31, 2014; quarterly results are unaudited. In the fourth quarter, the company began reporting two segments: facilities construction and maintenance, and systems integration. Its strategy emphasizes growing recurring, generally higher-margin maintenance and integration work while reducing reliance on large construction projects.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $28.0 million | $44.4 million |
| Gross profit / margin | $8.6 million / 31% | $9.0 million / 20% |
| Operating loss | $2.5 million | $2.6 million |
| Net loss | $2.8 million | $2.8 million |
| Loss per diluted share | $0.19 | $0.19 |
| Cash provided by (used in) operating activities | $0.6 million | ($2.1 million) |
| Cash and cash equivalents at year-end | $1.4 million | $3.3 million |
Revenue fell 37%, largely because construction revenue declined $9.5 million, a $4.9 million battery sale in 2013 did not recur, and facilities management revenue decreased $4.0 million. Systems integration revenue increased approximately $2.6 million, reflecting the 2013 acquisition. Segment revenue was $20.5 million for facilities construction and maintenance and $7.5 million for systems integration. Management reported unaudited fourth-quarter revenue of $8.4 million and net loss of $0.2 million, versus $13.1 million and $0.8 million, respectively, in fourth-quarter 2013; the fourth-quarter operating loss was $48,000.
Gross profit declined only 4% despite lower sales, and gross margin improved to 31% from 20%, reflecting the shift in revenue mix away from lower-margin construction and battery sales toward integration and maintenance. Selling, general and administrative expenses declined 6% to $10.5 million. Interest expense was $277,000. The company reported positive operating cash flow for the year, but working-capital movements were significant.
At year-end, current assets were $6.8 million and current liabilities were $8.9 million, a current ratio of approximately 0.76. The balance sheet showed $1.17 million outstanding on the revolving facility and $724,000 of convertible notes, net of discount. The $6 million revolving facility, secured by substantially all assets and subject to its receivables borrowing base, matures in May 2016; approximately $562,000 was available at year-end. The company was compliant with the facility’s covenant at year-end. It had $7.3 million of outstanding performance bonds and $1.1 million of purchase commitments.
Material changes, outlook and risks
- Management cited improved quarterly results after expense reductions: unaudited gross margin rose from 26% in the second quarter to 31% in the fourth quarter, and the fourth-quarter operating loss narrowed to $48,000. It also reported $3.1 million of positive operating cash flow in the second half, unaudited.
- In October 2014, TSS began selling receivables from its largest customer to a bank at a small discount, accelerating collection and reducing receivables by approximately $3 million. The bank facility was amended to exclude those receivables from its borrowing base.
- The auditor’s report includes an explanatory paragraph raising substantial doubt about TSS’s ability to continue as a going concern, citing recurring losses and a net working-capital deficiency. Management described liquidity measures and plans, but said additional funding may be needed; financing availability is not assured.
- After year-end, TSS borrowed $945,000 under a loan agreement allowing advances up to $2 million. The loan bears 12% annual interest, is secured by substantially all assets and is subordinated to Bridge Bank. The lender is affiliated with the board chairman and received a five-year warrant for up to 1,115,827 shares at tiered exercise prices. The filing does not state that the remaining $1.055 million was borrowed.
- Management gave no specific revenue or earnings guidance. Its stated priorities include growing maintenance and integration, improving operating efficiency and utilization, diversifying customers, and managing liquidity. It warned that revenue shortfalls, cost overruns or greater working-capital needs could require further financing or cost reductions.
- Customer concentration remains high: three customers generated 60% of 2014 revenue, and one U.S. IT OEM accounted for 44%. Most contracts are fixed-price (approximately 88% of revenue) and may be canceled on short notice; project cost estimates, change-order approvals and subcontractor performance affect results.
- Management identified a material weakness in financial reporting controls involving review of revenue support, journal entries, period-end cut-off, reconciliations, and accrued expenses and accounts payable. Disclosure controls and internal control over financial reporting were concluded ineffective at December 31, 2014. No auditor attestation on internal controls was provided.
- The company reported no material litigation and no goodwill or intangible-asset impairment for 2014. It had $30.9 million of net operating loss carryforwards, but maintained a full valuation allowance against deferred tax assets.
Most important facts for investors to verify
- Whether operating cash flow and gross-margin improvement continued after 2014, and whether the business reached sustained profitability.
- Current cash needs, receivables eligibility and remaining availability under the Bridge Bank facility, including the effects of customer receivables financing.
- Status and terms of any further advances under the related-party loan, and the potential dilution and economic impact of its warrant.
- Progress in remediating the material weakness and whether subsequent filings report effective controls.
- Revenue stability, renewal and cancellation exposure, customer concentration, and the profitability and cash requirements of fixed-price projects.
- Ability to maintain adequate bonding capacity and meet debt, lease and purchase commitments while addressing the auditor’s going-concern warning.