TSS, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. TSS provides design, construction, maintenance and systems integration services for mission-critical facilities, primarily data centers. All revenue was generated in the U.S.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $7.029 million | $5.847 million | $14.704 million | $13.119 million |
| Gross profit / margin | $2.168 million / 31% | $1.442 million / 25% | $3.473 million / 24% | $3.846 million / 29% |
| Operating loss | $60,000 | $1.131 million | $1.154 million | $1.461 million |
| Net loss | $169,000 | $1.218 million | $1.336 million | $1.620 million |
| Loss per share | $0.01 | $0.08 | $0.09 | $0.10 |
- Q2 revenue rose 20% year over year; six-month revenue rose 12%. In Q2, facilities revenue increased 9% and systems integration revenue increased 31%. For the first half, facilities revenue grew 24%, while systems integration revenue fell 22%.
- Q2 gross margin improved from the prior year, reflecting a more favorable mix, including higher-margin integration and modular data-center activity, and better facility utilization. First-half margin declined as project-management work involved more subcontracting and equipment procurement.
- SG&A fell 14% in both the quarter and first half, attributed to lower headcount-related costs and professional fees. Interest expense was $111,000 in Q2 and $191,000 for the first half, above the comparable prior-year amounts of $87,000 and $159,000.
Cash, debt and liquidity
- At June 30, cash was $540,000, down from $1.132 million at year-end 2015. Current assets were $4.208 million versus current liabilities of $8.418 million; stockholders’ deficit was $1.802 million. Total assets were $7.581 million and total liabilities $9.383 million.
- Operating activities provided $1.547 million in the first half, versus $1.074 million used in the prior-year period. The company attributed the improvement mainly to lower receivables and working-capital needs; receivables decreased $4.516 million from year-end.
- Investing activities used $176,000, principally for systems-integration equipment and software. Financing activities used $1.963 million, including repayment of $2.150 million under the Bridge Bank line; cash declined by $592,000 overall.
- In May, TSS replaced its Bridge Bank facility with a full-recourse receivables factoring agreement. RTS may purchase eligible receivables at its discretion, generally advancing 80% and charging prime plus 7%; there is no committed maximum facility amount. TSS reported $337,000 of borrowings under the agreement at quarter-end.
- Long-term borrowings, including current portions, had a carrying value of approximately $1.217 million at quarter-end, comprising $400,000 principal owed to director and CTO Gerard Gallagher and a $945,000 loan from MHW, an entity affiliated with board chairman Peter Woodward. The MHW loan bears 12% interest, is secured by substantially all assets, and matures in 2020. Gallagher’s notes bear 5% interest, with the remaining balance due July 2017 under an amended repayment schedule.
Outlook, risks and other notable items
- No quantified revenue or earnings guidance is provided. Management stated that projected cash flows, if achieved, should provide adequate resources for at least the next 12 months, but this depends on revenue and cost assumptions and financing availability. Management also disclosed that operating losses, a declining current ratio and stockholders’ deficit create uncertainty about the company’s ability to continue as a going concern.
- TSS was evaluating additional debt and equity financing; availability and acceptable terms were not assured. Failure to obtain financing could require cost reductions, changes to business activities, asset sales or bankruptcy protection. Equity financing could dilute existing holders.
- Customer concentration is significant: the largest U.S. IT OEM contributed 49% of Q2 revenue and 35% of first-half revenue. Management warns that losing this relationship or a material reduction in orders could significantly harm results. Large project timing also causes revenue and working-capital volatility.
- Fixed-price work exposes TSS to cost-estimation, labor, materials and productivity risks. Factoring advances are discretionary and include customer-account repurchase obligations, adding uncertainty to liquidity access.
- The company reported no material litigation and concluded disclosure controls and internal control over financial reporting were effective as of June 30, 2016. It reported no material changes to internal controls during the quarter.
Important facts for investors to verify
- Whether operating cash generation is repeatable, given the substantial first-half benefit from receivable collections and working-capital movements.
- Whether RTS continues purchasing eligible receivables on usable terms, and the resulting factoring costs, availability and recourse exposure.
- Progress toward sustained profitability and improved first-half gross margins, including the contribution and timing of large construction projects.
- Liquidity plans and ability to meet obligations, especially Gallagher note payments due in 2017 and financing needs beyond the stated 12-month outlook.
- Customer concentration, related-party financing arrangements, and potential dilution or restrictions if new debt or equity is raised.