TSS Inc(US:TSSI)2025-11-13 21:08Revenue Performance - Total revenues for the quarter ended September 30, 2025, decreased by 40% to $41.9 million, with procurement revenues down by $29.4 million (49%) and facilities management revenues down by $0.4 million (19%) [121] - Systems integration revenues increased by $1.6 million (20%) due to growth in AI-enabled computer rack integration, which began significant volume in June 2024 [122] - Total revenues for the nine-month period ended September 30, 2025, increased by 88% to $184.8 million, driven by a 100% increase in procurement revenues and a 78% increase in systems integration revenues [142] - Recognized revenue from procurement deals increased 100% year-over-year, from $77.0 million to $154.3 million [146] Profitability and Margins - Gross profit from procurement transactions decreased by 30% from $3.7 million in Q3 2024 to $2.6 million in Q3 2025 [128] - Gross margin for the procurement segment improved from 4.7% in the prior year quarter to 5.3% in the current quarter [130] - Facilities management segment gross margins increased to 55% in the current quarter, up from 37% in the prior year quarter [134] - Consolidated gross margin decreased from 15% to 12%, with procurement business margins at 8% and systems integration at 24% [149] - Operating income slightly declined to $5.4 million from $5.7 million due to increased SG&A expenses [156] Expenses and Losses - Operating loss for the current quarter was $0.9 million compared to operating income of $3.8 million in the prior year quarter, primarily due to increased depreciation and fixed costs [137] - Net loss for the current quarter was $1.5 million, or $0.06 per diluted share, compared to net income of $2.6 million, or $0.10 per diluted share, in the prior year quarter [140] - SG&A expenses increased by $1.4 million in the current quarter, with half of the increase attributed to non-cash equity-based compensation [135] - SG&A expenses increased by $5.9 million (65%), primarily due to higher headcount and non-cash equity-based compensation [152] Investments and Facility Improvements - The company invested approximately $35.1 million in improvements to its new facility to enhance electrical power and cooling capabilities for AI-enabled racks [112] - The company invested approximately $1.7 million in its Round Rock facility to expand capacity for integrating generative AI-enabled server racks, with most of the investment reimbursed by a customer [117] - The company invested $32.7 million in the new facility buildout, significantly up from $1.8 million in the prior year [166] Debt and Liquidity - The company has an outstanding debt principal balance of $24.4 million as of September 30, 2025, which bears a variable interest rate linked to the 1-month SOFR [174] - The outstanding principal on the company's debt increased from $20.0 million to $24.4 million in the most recent quarter [174] - The company may require additional capital for new business lines, acquisitions, or facility expansions [170] - The company relies on cash on hand and operational funds, including customer financing, to meet liquidity and capital requirements [170] - The company may consider issuing new equity or debt as a potential step to address liquidity issues [170] Deferred Revenues and Contracts - Deferred revenues increased by $8.7 million compared to December 31, 2024, primarily related to ongoing contracts and projects expected to complete in late 2025 and early 2026 [121] - The company has signed a multi-year agreement with its largest customer for systems integration services, which includes minimum monthly payments to cover facility costs [122] Supply Chain and Operational Challenges - Supply chain issues are expected to continue impacting non-AI rack integration services, causing delays in revenue recognition [125] - The decrease in procurement revenues was primarily driven by reduced purchases from the federal government compared to the prior year quarter [126] Interest Expenses - Interest expense decreased to $1.0 million in the current quarter from $1.3 million in the prior year quarter due to a decrease in gross value of procurement transactions [138] - Interest expense rose to $3.3 million from $2.0 million, attributed to increased procurement transaction values and outstanding construction loan [157] - A hypothetical increase of 25 basis points in annual rates could lead to an increase in annual interest expense by approximately $61,000 [174] - The company factors a gross value of accounts receivable estimated at $200 million, with a potential 25 basis point change in SOFR affecting annual interest expense by about $107,000 [175] Accounting Policies - There have been no material changes to the company's critical accounting policies since the Annual Report for the year ended December 31, 2024 [173]