TSS Inc(TSSI) - 2025 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section details the company's unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and related notes on accounting policies, segment performance, debt, and internal controls Item 1. Consolidated Financial Statements This section presents TSS, Inc.'s unaudited consolidated financial statements as of March 31, 2025, highlighting significant revenue and net income growth driven by AI rack integration services - Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $27,339 | $23,222 | | Total current assets | $61,082 | $58,197 | | Property and equipment, net | $23,276 | $8,591 | | Total assets | $113,539 | $96,568 | | Total current liabilities | $72,205 | $56,919 | | Total liabilities | $104,148 | $89,430 | | Total stockholders' equity | $9,391 | $7,138 | - Consolidated Statement of Operations Highlights (in thousands, except per-share amounts) | Account | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Total revenues | $98,959 | $15,892 | | Gross profit | $9,210 | $2,714 | | Income from operations | $4,113 | $253 | | Net income | $2,979 | $15 | | Earnings per common share – Basic | $0.13 | $0.00 | | Earnings per common share – Diluted | $0.12 | $0.00 | - Consolidated Statement of Cash Flows Highlights (in thousands) | Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,637 | $2,646 | | Net cash used in investing activities | ($14,873) | ($39) | | Net cash used in financing activities | ($1,647) | ($55) | | Net increase in cash | $4,117 | $2,552 | Note 1 – Significant Accounting Policies The company enhanced its data center services to include AI-enabled server rack integration, with a single OEM customer accounting for nearly all revenue and receivables - The company's services have been enhanced to include the integration of Artificial Intelligence (AI) enabled data center server racks[23] - A single US-based IT OEM customer accounted for 100% of revenues for the three months ended March 31, 2025, and 99% of trade accounts receivable at March 31, 2025[48] - The company sold approximately $121.1 million in receivables under a non-recourse factoring agreement in Q1 2025, resulting in $1.5 million in financing fees[51] Note 2 – Supplemental Balance Sheet Information This note details key balance sheet accounts, showing a significant increase in Property and Equipment, net, driven by construction in process for a new facility, and growth in inventories - Property and Equipment (in thousands) | Category | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Construction in Process | $21,526 | $6,701 | | Total Gross P&E | $27,168 | $12,295 | | Property and equipment, net | $23,276 | $8,591 | - Inventories, net (in thousands) | Category | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Procurement inventories | $19,845 | $17,493 | | Inventories, net | $20,396 | $17,673 | Note 3 - Long-Term Debt The company secured a $20.0 million term loan in December 2024 to fund improvements at its new Georgetown, Texas facility, with $8.7 million outstanding as of March 31, 2025 - On December 31, 2024, the company entered a new Credit Agreement for a $20.0 million term loan facility to fund the build-out of its new headquarters and production facility in Georgetown, Texas[79] - Upon closing, the company borrowed $8.7 million, with no additional draw-downs made in the quarter ended March 31, 2025[79] - The remaining available funds for construction at March 31, 2025, were $11.3 million, which were fully drawn down in May 2025[82][99] Note 6 - Segment Reporting The company reorganized into three segments: Procurement, Systems Integration, and Facilities Management, with Procurement being the largest contributor to Q1 2025 revenue and pre-tax income - Effective Q4 2024, the company reorganized into three reportable segments: Procurement, Systems Integration, and Facilities Management[90][91] - Segment Performance for Three Months Ended March 31, 2025 (in thousands) | Segment | Total Revenue | Gross Profit | Pre-tax Income | | :--- | :--- | :--- | :--- | | Procurement | $90,177 | $7,028 | $5,662 | | Systems Integration | $7,484 | $1,651 | $259 | | Facilities Management | $1,298 | $531 | $366 | | Total Segments | $98,959 | $9,210 | $6,287 | - Segment Total Assets (in thousands) | Segment | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Procurement | $24,845 | $19,319 | | Systems Integration | $33,707 | $25,855 | | Facilities Management | $739 | $932 | | Total Segments | $59,291 | $46,106 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2025's significant operational and financial developments, including strategic focus on AI-enabled rack integration, substantial revenue growth, and strong liquidity Overview The company is expanding its AI-enabled server rack integration services through a multi-year customer agreement and a $25-$30 million investment in a new facility, funded by a $20 million construction loan and landlord contribution - The company signed a multi-year agreement with its largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume[107] - To support this agreement, the company is moving to a new facility and anticipates capital expenditures of approximately $25 million to $30 million for improvements[107] - Funding for the new facility includes a $20 million construction loan from Susser Bank, a $6.8 million contribution from the landlord, and cash on hand[107] Results of Operations Total revenues surged 523% to $99.0 million in Q1 2025, driven by 676% growth in Procurement and 253% in Systems Integration, leading to a net income of $3.0 million - Revenue by Segment (in millions) | Segment | Q1 2025 | Q1 2024 | % Change | | :--- | :--- | :--- | :--- | | Procurement | $90.2 | $11.6 | +676% | | Systems Integration | $7.5 | $2.1 | +253% | | Facilities Management | $1.3 | $2.1 | -40% | | Total | $99.0 | $15.9 | +523% | - The gross value of all procurement transactions increased 431% to $106.0 million, with the segment's contribution to pre-tax income increasing 807% to $5.7 million[121] - Systems Integration gross profit increased 173% to $1.7 million, and excluding non-cash rent, the segment's gross margin would have improved from 28% to 32%[123] - Net income for Q1 2025 was $3.0 million ($0.12 per diluted share), a significant improvement from $15,000 ($0.00 per diluted share) in Q1 2024[130] Liquidity and Capital Resources The company maintains robust liquidity with cash increasing to $27.3 million, supported by $20.6 million in operating cash flow and the utilization of a receivables factoring program - Cash Flow Summary (in millions) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Cash from Operations | $20.6 | $2.6 | | Cash from Investing | ($14.9) | ($0.04) | | Cash from Financing | ($1.6) | ($0.06) | - Investing activities consisted of $14.9 million in capital expenditures, primarily for the build-out of the new leased integration facility[137] - Subsequent to quarter-end, on May 5, 2025, the company borrowed the remaining $11.3 million available on its construction loan, bringing total borrowed funds to $20.0 million[132] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company has indicated that this section is not applicable - The company states that this item is 'Not applicable'[143] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2025, due to a material weakness in internal control over financial reporting, with remediation efforts ongoing - Management concluded that disclosure controls and procedures were ineffective as of March 31, 2025[146] - The ineffectiveness is due to a material weakness identified during the 2024 audit, relating to the ineffective design of certain management review controls[147] - Remediation efforts have begun in Q1 2025, including enhancing controls and engaging external experts, but the process is ongoing[148][151] PART II – OTHER INFORMATION This section covers other required disclosures, including unregistered sales of equity securities and a list of exhibits filed with the Form 10-Q Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2025, the company repurchased 124,205 shares at an average price of $13.32 per share, primarily from employees for tax withholding obligations - Share Repurchases in Q1 2025 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2025 | 58,241 | $14.63 | | Feb 2025 | 63,658 | $12.30 | | Mar 2025 | 2,306 | $8.25 | | Total | 124,205 | $13.32 | - All share purchases were from associates to satisfy tax withholding requirements and were not open market trades, with no publicly announced share buyback program[152] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL financial data files - Filed exhibits include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[153][154] - The filing includes Inline XBRL documents for interactive data[155] Signatures This section confirms the official signing and submission of the Form 10-Q by the company's Chief Financial Officer - The report was duly signed on May 15, 2025, by Daniel M. Chism, the Chief Financial Officer of TSS, Inc[159]