TSS, Inc.

a) Audited Financial Statements

To the Board of Directors and Stockholders

TSS, Inc.

Round Rock, TX

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of TSS, Inc. and Subsidiaries (the Company) as of December 31, 2024 and 2023, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

As discussed in Note 1 to the consolidated financial statements, the Company had one customer which accounted for 99% and 96%, respectively, of total revenue for the years ended December 31, 2024, and 2023. Our opinion is not modified with respect to this matter.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Integration Services Revenue Recognition

Critical Audit Matter Description

As described in Note 1 to the consolidated financial statements, management follows the guidance provided in Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 606,Revenue from Contracts with Customers (“ASC 606”), for determining, among other things, when a contract exists, and control of the promised goods or services is transferred in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. In these instances, management identifies the nature of its promised services in the contract and determines when and at what amount(s) revenue should be recognized based on the terms of their contracts. As disclosed, in October 2024, 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. Judgments are used in determining the amount and timing of revenue particularly when determining the transaction price, satisfaction of the performance obligation, and timing of recognition identified under this new contract.

The principal considerations for our determination that performing procedures relating to revenue recognition of this new contract as a critical audit matter are that the application of revenue recognition is complex and it requires management judgment particularly when referring to transaction price, assessing the indicators that management has completed the performance obligation and when to recognize revenue. This in turn led to significant audit judgment and effort in performing procedures to evaluate the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included gaining an understanding of controls around management’s evaluation of this new customer contract. These procedures also included, among others, obtaining and evaluating the new contract and related amendments, testing the reasonableness of management’s assessment of the indicators of completion of the performance obligation, testing management’s calculations for how and when revenue should be recognized based on volume commitments and the underlying data which was used in the calculations, where applicable, and considering whether these conclusions were consistent with evidence obtained in other areas of the audit.

/s/WEAVER AND TIDWELL, L.L.P.

We have served as the Company’s auditors since 2015.

Fort Worth, Texas

Auditor firm ID 410

April 15, 2025

(in’000 except per-share amounts)

(in’000 except per-share amounts)

Consolidated Statements of Changes in Stockholders’** Equity**

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(in’000)

Note 1 - Significant Accounting Policies

Description of Business

TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the planning, design, deployment, maintenance, refresh and take-back of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Our systems integration services have recently been enhanced to include integration of Artificial Intelligence (AI) enabled data center server racks. TSS was incorporated in Delaware in December 2004. Our corporate offices and our integration facility are located in Round Rock, Texas.

The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U. S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable and that the actual results will not vary significantly from the estimated amounts.

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no net effect on our reported results of operations, financial position or cash flows.

Liquidity

As of December 31, 2024, the Company had an accumulated deficit of $60.3 million. Although we reported a small net income of $0.1 million in 2023 and improved net income of $6.0 million in 2024, we do have a history of operating and net losses over the preceding several years which were due, in part, to the effects of COVID-19 and subsequent supply chain constraints. In June 2024, we began integrating AI-enabled computer racks for our largest OEM customer at a much greater volume than prior to that point, and in October 2024, signed a multi-year agreement with that customer providing for the coverage of a portion of our fixed costs as well as minimum volume commitments of AI racks for the next several years, significantly enhancing our expectation of continuing our recent trend of operating profitably and reducing our accumulated deficit. In December 2024, we also secured a new manufacturing facility and long-term bank financing for the capital investments required to fulfil that agreement. Our procurement business, which we began in 2019, has also increased materially in both revenues and earnings. Management has evaluated the significance of these conditions in relation to its ability to meet its ongoing obligations and whether it indicates doubt as to our ability to continue as a going concern. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand, funds generated from operations, including the funds from our customer financing programs, trade credit extended to us by our vendors, and fund available under our construction loan. We believe these factors have combined to substantially mitigate the risks that we might not be able to continue as a going concern. If our future results do not meet our expectations, management believes that we can implement reductions in selling, general and administrative expenses to better achieve profitability, and therefore improve cash flows, or that we could take further steps such as the issuance of new equity or debt. We may also require additional capital if we seek to acquire additional businesses to increase the scale of our operations, or if there is a sudden increase in the level of procurement services. We also recently filed a shelf registration statement on Form S-3, enabling us to raise up to $150 million from the capital markets, if needed to finance our operations or growth. There can be no assurance as to the Company’s ability to continue to operate profitably or to scale its business operations on terms upon which additional financing might be available.

Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have been able to grow our revenues and order backlog and have seen an improvement in supply chain constraints, as well as a significant and sustained improvement in our earnings since June 2024. We believe that we will continue to be profitable on a quarterly and annual basis in 2025. As a result, management has concluded that there is not substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a reasonable period.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

Financial Instruments

The Company’s financial instruments primarily consist of cash and cash equivalents including money market accounts, accounts receivable, accounts payable and debt.* The carrying amounts of the other financial instruments approximate their fair value on December 31, 2024, and 2023, due to the short-term nature of these items. SeeNote 7*–* Fair Value Measurements.*

Accounting for Business Combinations

We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, is recorded as goodwill.

We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer contracts, leases, and any other significant assets or liabilities and contingent consideration. Preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.

Revenue Recognition

We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative standalone selling prices.

Maintenance services

We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. Our contract terms typically are one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services on a ratable basis over the contract term. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment. However, our history of non-payments and bad debt expenses has been insignificant.

Integration services

We generate integration services revenues by providing our customers with customized systems and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods.

Pursuant to a multi-year agreement signed in 2024, we also recognize revenue monthly at contractually based amounts for certain billable fixed and facility costs and trained staffing levels to support the weekly quantity of AI-enabled racks, with staffing fees reduced for any under-staffing. The fee for staffing is based on defined services as transferred to the customer and are not variable consideration because the customer’s usage is known weekly and is not contingent on the occurrence of any future events or subject to any estimation.

We typically extend credit terms to our integration customers based on their creditworthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-105 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness. As of December 31, 2024, and 2023, our allowance for doubtful accounts was $7,000.

Equipment and Material sales

We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment or materials to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods and when we have completed our contractual obligations. Typically, we do not receive advance payments for equipment or material sales; however, if we do, we record the advance payment as deferred revenues. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment and material sales are typically due within 30-45 days of invoicing.

Deployment and Other services

We generate revenues from fees we charge our customers for other services, including repairs or other services not covered under maintenance contracts; installation and servicing of equipment, including modular data centers; and other fixed-price services including repair, design and project management services, or the moving of equipment to a different location. In some cases, we arrange for a third party to perform warranty and servicing of equipment, and in these instances, we recognize revenue as the amount of any fees or commissions that we expect to be entitled to. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional.

Procurement services

We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf, some of which are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our procurement services revenues upon completion of the procurement activity. For any procurement activities in which we somehow transform the product, the revenues recognized on these transactions are the gross sales amount of the transaction, and we recognize offsetting costs of sales for any costs we incur to procure the related goods (“gross deals”). In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided directly to our customers by another party and we have no control of the goods before they are transferred to the customer and do not transform the product in any way. In these instances, we are acting as an agent in the transaction and recognize revenue on a net basis, recording only the amount of any fee or commissions that we expect to be entitled to after paying the other party for the goods or services provided to the customer (“net deals”). Accounts receivable from our procurement activities are typically due within 80 days of invoicing. The majority of the procurement activities generally involve us transforming the product, and as such the majority of these transactions are recorded gross. In order to accelerate the time period in which we receive payment, we generally factor the procurement services receivables utilizing a program that we estimate has an effective annualized interest rate below the rate at which we could borrow funds. Regardless of whether the transaction is recorded as a gross transaction or a net transaction, the interest we are charged through the factoring program is based on the gross value of the transaction.

The following table presents our revenues disaggregated by reportable segment and by product or service type (in ’000’s):

Judgments

We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.

Sales taxes

Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.

Shipping and handling costs

Costs for shipping and handling activities, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of sales and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has been transferred to the customer.

Remaining Performance Obligations

Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of one year or less, we have elected the practical expedient applicable to such contracts and we do not disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of December 31, 2024, deferred revenue of $3,384,000 includes $1,476,000 of our remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and $1,908,000 relates to procurement and integration services where we have yet to complete our services for our customers. Of the $1,908,000 deferred revenues related to procurement and integration services, $1,137,000 is expected to be recognized within one year, and $771,000 is expected to be recognized beyond one year. Contract liabilities, consisting of deferred revenues were $3,370,000 on December 31, 2023, and $2,080,000 on December 31, 2022.

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. For awards with performance-based vesting criteria, we recognize expense only once it is deemed probable that the performance criteria will be met. We award shares of restricted stock and stock options to employees, managers, executive officers, and directors for both incentive and retention purposes.

During the years ended December 31, 2024, and 2023, we incurred approximately $1.2 million and $0.6 million, respectively, in non-cash compensation expense which was included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations*.*

Concentration of Credit Risk

We are economically dependent upon our relationship with a large US-based IT Original Equipment Manufacturer (OEM). If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to them would significantly reduce our revenue.

The following customer accounted for a significant percentage of our revenues for the periods shown:

No other customers represented more than 10% of our revenues for any periods presented. Our U.S. based IT OEM customer represented 98% and 96% of our trade accounts receivable on December 31, 2024 and 2023, respectively. No other customer represented more than 10% of our accounts receivable on December 31, 2024, or 2023.

Cash and cash equivalents

Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of bank time deposits. We had unrestricted cash of $18.2 million and $11.6 million more than FDIC insured limits on December 31, 2024, and 2023, respectively. Cash and cash equivalents includes a $5.0 million deposit in a money market account securing our outstanding bank debt at December 31, 2024 and none at December 31, 2023. Under the terms of the loan agreement, we can at any point request that the bank apply the deposit as a reduction of loan principal.

Contract and Other Receivables

Accounts receivables are recorded at the invoiced amount and may bear interest in the event of late payment under certain contracts.

Allowance for Doubtful Accounts

We estimate an allowance for doubtful accounts based on estimated credit losses, based on factors related to the specific credit risk of each customer. Historically our credit losses have been minimal. We perform credit evaluations of new customers and may require prepayments or the use of bank instruments such as trade letters of credit to mitigate credit risk. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.

The following table summarizes the changes in our allowance for doubtful accounts (in ’000):

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all purchased inventories. We write down obsolete inventory or inventory more than our estimated usage to its estimated realizable value less cost to sell, if less than its cost. Inherent in our estimates of net realizable value in determining inventory valuation are estimates related to future demand and technological obsolescence of our products. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventories and our results of operations and financial position could be materially affected.

Property and Equipment

Property and equipment are recorded at cost. We provide for depreciation using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. Depreciation expense is included in operating expenses in the consolidated statements of operations. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.

Goodwill and Intangible Assets

We have recorded goodwill and intangible assets with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. These intangible assets are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is not amortized. The recorded goodwill is allocated to the reporting unit to which the underlying transaction relates.

U. S. GAAP requires us to perform an impairment test of goodwill on an annual basis or whenever events or circumstances make it more likely than not that impairment of goodwill may have occurred. As part of the annual impairment test, we review for indicators of impairment as “Step Zero” of the annual impairment test as defined by U.S. GAAP and if any exist, we compare the fair value of the reporting unit with its carrying amount. If that fair value exceeds the carrying amount, no impairment charge is required to be recorded. If the carrying value exceeds the reporting unit’s fair value, we would recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of a reporting unit will be determined using a discounted cash flow, which requires the use of estimates and assumptions. Significant assumptions that may be required include forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may have a material impact on the conclusions reached.

We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.

We have elected to use December 31 as our annual assessment date. As circumstances change that could affect the recoverability of the carrying amount of the assets during an interim period, we will evaluate our indefinite lived intangible assets for impairment. The Company performed a quantitative analysis of our indefinite lived intangible assets on December 31, 2024, and 2023 and concluded there was no impairment. The valuation results indicated that the fair value of our reporting units was greater than the carrying value, including goodwill, for each of our reporting units. Thus, we concluded that there was no impairment on December 31, 2024, or 2023 for our goodwill and other long-lived intangible assets. On December 31, 2024, and 2023, the carrying value of goodwill was $0.8 million.

Income Taxes

Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The U.S. net operating losses generated prior to 2018 and not utilized can be carried forward for 20 years to offset future taxable income. A full valuation allowance has been recorded against our net deferred tax assets, because we have concluded that under relevant accounting standards it is more likely than not that deferred tax assets will not be realizable. We re-evaluate this assessment quarterly and if we determine, after weighing all positive and all negative evidence available at that time, that it is more likely than not that the deferred tax asset will be realizable, we will remove the valuation allowance at that point in time. We recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.

Non-recourse factoring

We have entered into a factoring agreement with a financial institution to sell certain of our accounts receivables from one US-based OEM customer under a non-recourse agreement. Under the arrangement, we sell certain trade receivables on a non-recourse basis and account for the transaction as sales of the receivable. The financial institution assumes the full risk of collection, without recourse to the Company in the event of a loss. The debtor is directed to send payments directly to the financial institution. The applicable receivables are removed from our consolidated balance sheet when the cash proceeds are received by us. We do not service any factored accounts after the factoring has occurred. We utilize this factoring arrangement as part of our financing for working capital. The aggregate gross amount factored under this arrangement was approximately $184 million and $137 million for the years ended December 31, 2024, and 2023, respectively. We paid financing fees under this arrangement of approximately $2,595,000 and $1,963,000 for the years ended December 31, 2024 and 2023, respectively, which was recorded as interest expense, net in our consolidated statement of operations excluding $6,000 that was recorded as deferred costs at December 31, 2023 as the interest related to projects where revenue has not yet been recognized. These deferred costs were recorded as interest expense when the project revenue was recognized.

Earnings Per-Common Share

Basic and diluted earnings per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purposes of determining diluted earnings per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

Treasury Stock

We account for treasury shares using the cost method. Purchases of shares of common stock are recorded at cost and result in a reduction of stockholders’ equity. We hold repurchased shares in treasury for general corporate purposes, including issuances under various employee compensation plans and from time to time may retire all or a portion of the treasury shares, reducing the issued and treasury share counts. When treasury shares are issued, we use a weighted average cost method. Purchase costs in excess of reissue price are treated as a reduction of retained earnings. Reissue price more than purchase costs is treated as additional paid-in-capital.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In June 2016, FASB issued Accounting Standards Update ASU 2016-13,Financial Instruments–Credit Losses(Topic 326):Measurement of Credit Losses on Financial Instruments("ASU 2016-13”). The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets. Among the provisions of ASU 2016-13 is a requirement that assets measured at amortized cost, which includes trade accounts receivable, be presented at the net amount expected to be collected. This pronouncement requires that an entity reflect all of its expected credit losses based on current estimates which will replace the current standard requiring that an entity need only consider past events and current conditions in measuring an incurred loss. We adopted this guidance effective January 1, 2023, and it did not have a material impact on our financial results of operations.

In May 2019, FASB issued Accounting Standards Update 2019-15,Financial Instruments–Credit Losses (Topic 326), (AASU 2019-15”). ASU 2019-15 provides guidance that allows entities to make an irrevocable one-time election upon adoption of the new credit loss standard to measure financial assets at amortized cost (except held-to-maturity securities) using the fair value option. The effective date and transition methodology are the same as in ASU 2016-13. We adopted this guidance effective January 1, 2023, and it did not have a material impact on our financial results of operations or financial position.

In November 2023, FASB issued Accounting Standards Update ASU No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.("ASU 2023-07”). ASU 2023-07 improves reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision-maker and included within each reported measure of segment profit (referred to as the "significant expense principle”). We adopted this guidance effective for the annual period ended December 31, 2024. It did not have a material impact on our financial results of operations or financial position, other than the enhanced disclosures. At the same time as adopting this guidance, we also re-assessed our segmentation and determined we now have three reportable segments whereas we have historically had three reportable segments. In interim periods after December 31, 2024, the new guidance will be applied retrospectively for all prior periods presented in the financial statements.

Recently Issued Accounting Pronouncements

In December 2023, FASB issued ASU No. 2023-09,Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, this ASU requires certain disclosures of state versus federal income tax expense and taxes paid. This ASU is effective for our Annual Report on Form 10-K for the year ending December 31, 2025, with early adoption permitted. We do not expect the adoption of ASU 2023-09 to have a material impact on our financial statements.

In November 2024, FASB issued ASU 2024-03,Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40) (“ASU 2024-03”), which will require that entities provide more granular footnote disclosures of the details contained in certain captions on the company’s income statement, such as “Selling, General and Administrative” expenses. This new guidance is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, which early adoption permitted. We have not yet determined all the effects that adoption of this new guidance will have on our statement of operations and related footnote disclosures. We do not expect its adoption to affect our net operating results or financial position.

Note 2 - Supplemental Balance-sheet Information

Receivables

Contract and other receivables consisted of the following (in ‘000’s):

Contract assets, consisting of accounts receivable, were $2,745,000 at December 31, 2022.

Inventories

We state inventories at the lower of cost or net realizable value, using the first-in-first-out-method (in ‘000’s) as follows:

Goodwill and Intangible Assets

Goodwill and Intangible Assets consisted of the following (in ‘000’s):

Goodwill attributable to reporting units (in ‘000’s):

We recognized amortization expense related to intangibles of approximately $0 and $35,000 for the years ended December 31, 2024, and 2023, respectively.

Property and equipment

Property and equipment consisted of the following (in ’000’s):

Depreciation of property and equipment and amortization of leasehold improvements and software and software implementation costs totaled $0.6 million and $0.2 million for the years ended December 31, 2024, and 2023, respectively.

Other Assets

Other assets, non-current is comprised of the following amounts (in $000’s):

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (in ’000’s):

Note 3 - Long-Term Debt

In May 2024, we renewed our revolving line of credit (the "revolving credit facility”) with Susser Bank, National Association ("Lender”), dated effective May 5, 2024. The obligations under the revolving credit facility were secured by substantially all of our assets. Our wholly owned subsidiaries jointly and severally guaranteed our obligations under the revolving credit facility. We terminated the revolving credit facility on December 31, 2024 when we entered a new credit agreement with Susser Bank described below. There were no borrowings outstanding on the revolving credit facility at any point during the periods presented.

On December 31, 2024, we entered into a new Credit Agreement (the “Credit Agreement”) with Susser Bank to fund improvements at the Georgetown, Texas location we leased on December 2, 2024 to which we plan to move the majority of our operations and our headquarters. Loan proceeds may also be used for ordinary working capital purposes and loan closing costs. The Credit Agreement provides for a $20.0 million term loan facility, and the option for additional incremental term loans of up to $5.0 million (the “accordion feature”), pending Lender approval. During the construction period, not to extend beyond July 5, 2025, we may make periodic draw-downs to fund or reimburse us for costs of the buildout of the new facility. During the construction period, required payments are interest only and any outstanding borrowings convert to a term loan upon the earlier of July 5, 2025 or completion of construction. Regardless of the actual construction completion date, the total loan term including the interest-only period, is designed to be approximately five years, with a final due date of January 5, 2025. Upon closing, we borrowed $8.7 million, with $5.0 million of that amount deposited in a required interest-bearing cash collateral account, $3.4 million reimbursed to us for capital expenditures previously funded with our operating cash, and $0.3 million funding loan closing costs. The loan is secured by substantially all of our assets.

Interest accrues at a rate per annum equal to 1-month SOFR plus 3.0%, subject to a 4.5% floor. Upon an event of default, interest would accrue at a rate equal to the normal rate plus 2.0%. Payments are interest only during the construction period. Once converted to a term loan, which occurs at the earlier of (i) completion of construction or (ii) July 5, 2025, the loan converts to a fully amortizing term loan and payments of principal and interest under the term loan are due and payable monthly.

The Credit Agreement includes customary affirmative covenants for secured transactions of this type, including maintaining adequate books and records, periodic financial reporting, compliance with laws, maintenance of insurance, maintenance of assets, timely payment of taxes, and notices of adverse events. It also includes customary negative covenants including incurrence of other indebtedness, mergers, consolidations and transfers of assets and liens on our assets. The Loan Agreement and ancillary documents also include customary events of default, including payment defaults, failure to perform or observe terms, covenants or agreements included in the Loan Agreement and ancillary documents, insolvency and bankruptcy defaults, judgment defaults, material adverse chance defaults, and change of ownership defaults. Financial covenants require us to maintain a leverage ratio, as defined in the agreement, of no more than 3.75x through September 30, 2025; 2.75x from then to September 30, 2026; and 2.00x after that, and a debt service coverage ratio, as defined in the agreement, of at least 1.25x.

The remaining available funds for construction at December 31, 2024 are $11.3 million, or $16.3 million if the accordion feature were utilized.

Note 4 – Leasing Arrangements

We have operating leases for our office and integration facilities in both Round Rock, Texas and Georgetown, Texas as well as for certain equipment and vehicles. Our leases have remaining lease terms of 11 to 120 months. As of December 31, 2024, we have not entered into any lease arrangement classified as a finance lease.

We determine if an arrangement is a lease at inception. Operating leases are included in the lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our consolidated balance sheets. We have elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. We also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, we did not need to reassess whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.

Right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight- line basis over the lease term. Components of lease expense and other information is as follows (in ‘000’s):

The following presents information regarding the Company's operating leases as of December 31:

Future minimum lease payments under non-cancellable leases as of December 31, 2024, were as follows (in ‘000’s):

Note 5–** Income Taxes**

Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are established for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates. The provision for income taxes from continuing operations consists of the following (in $’000):

The significant components of our deferred tax assets and liabilities are as follows (in $’000):

On December 31, 2024, and 2023, we had net operating losses ("NOL”) of approximately $37 million and $40 million, respectively, to offset future taxable income. A portion of the Company’s NOL will begin to expire in 2028.

Utilization of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.

Our provision for income taxes reflects the establishment of a full valuation allowance against deferred tax assets as of December 31, 2024 and 2023. Accounting Standards Codification Topic 740Income Taxes requires management to evaluate its deferred tax assets on a regular basis to reduce them to an amount that is realizable on a more likely than not basis. During 2024, the valuation allowance decreased by approximately $561,000 due to continuing operations. In determining our provision for income taxes, net deferred tax assets, liabilities and valuation allowances, we are required to make judgments and estimates related to projections of profitability, the timing and extent of the utilization of net operating loss carryforwards and applicable tax rates. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from the projections.

We have adopted the provisions of the guidance related to accounting for uncertainties in income taxes. We have analyzed our current tax reporting compliance positions for all open years and have determined that we do not have any material unrecognized tax benefits. Accordingly, we have omitted the tabular reconciliation schedule of unrecognized tax benefits. We do not expect a material change in unrecognized tax benefits over the next 12 months. All of our prior federal and state tax filings from the 2022 tax year forward remain open under statutes of limitation. Operating losses generated in years prior to 2022 remain open to adjustment until the statute closes for the tax year in which the net operating losses are utilized.

The Company’s provision for income taxes attributable to continuing operations differs from the expected tax provision amount computed by applying the statutory federal income tax rate of 21% to income before taxes for the years ended December 31, 2024, and 2023 primarily because of the following:

Note 6–Commitments and Contingencies

Rent expense included in selling, general and administrative expenses on the accompanying Consolidated Statement of Operations for operating leases was approximately $0.3 million and $0.2 million for the years ended December 31, 2024 and 2023, respectively. Rent expense included in cost of revenue for operating leases was $1.4 million and $1.0 million for the years ended December 31, 2024, and 2023, respectively.

In the normal course of business, we issue binding purchase orders to subcontractors and equipment suppliers. At December 31, 2024, these open purchase order commitments amount to approximately $98.0 million, with $97.5 million of that related to our procurement segment operations. The majority of services to be delivered and inventory or equipment to be received is expected to be satisfied during the first six months of 2025 at which time these commitments will be fulfilled.

We are not a party to any material litigation in any court, and we are not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business such as employment-related matters. We believe that any potential liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

Note 7–Fair Value Measurements

U. S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U. S. GAAP also established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of December 31, 2024, we did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques. In addition, certain non-financial assets and liabilities are to be initially measured at fair value on a non-recurring basis. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and non-financial, long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets and liabilities, including goodwill and property and equipment, are measured at fair value using Level 3 inputs, which result in management’s best estimate of fair value from the perspective of a market participant, when there is an indication of impairment and are recorded at fair value only when impairment is recognized.

Note 8–Share-Based Payments

In January 2007, our stockholders approved the Company’s 2006 Omnibus Incentive Compensation Plan, which was designed to attract, retain and motivate key employees. Under this plan, we reserved 5.1 million shares of our common stock for issuance to employees and directors through incentive stock options, non-qualified stock options or restricted stock. In June 2015, our stockholders approved a new 2015 Omnibus Incentive Compensation Plan (the "Plan”) and reserved a further 2.5 million shares of our common stock for issuance to employees and directors through incentive stock options, non-qualified stock options or restricted shares. At our 2021 Annual Meeting of Stockholders our stockholders approved a further increase of 3.0 million shares of our common stock reserved for our 2015 plan. On December 31, 2024,1,787,068 shares remain available for issuance.

The Plan is administered by the compensation committee of our Board of Directors. Subject to the express provisions of the Plan, the compensation committee has the Board of Directors' authority to administer and interpret the Plan, including the discretion to determine the form of grant, exercise price, vesting schedule, contractual life and the number of shares to be issued. We have historically issued restricted stock under the Plan; however, as further incentive to key employees, the Company also issued options to purchase shares of our common stock during the years ended December 31, 2024 and 2023.

Stock-based Compensation Expense

For the years ended December 31, 2024, and 2023, we recognized stock-based compensation of approximately $1,235,000 and $581,000, respectively, which was included in selling, general and administrative expenses on the accompanying Consolidated Statements of Operations.

As of December 31, 2024, the total unrecognized compensation cost related to unvested restricted stock and options to purchase common stock was approximately $1.7 million with a weighted average remaining vest life of 1.49 years.

Stock Options

Although we have historically issued restricted stock under the Plan, we also issued options to purchase shares of our common stock during the years ended December 31, 2024 and 2023. Option grants can have various vesting features but typically involve time-based vesting.

Fair Value Determination –We utilize a Black-Scholes-Merton model to value stock options vesting over time. We will reconsider the use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate or if grants issued in future periods have characteristics that cannot be reasonably estimated under these models.

Volatility -The expected volatility of the options granted was estimated based upon historical volatility of our share price through weekly observations of our trading history corresponding to the expected term for Black-Scholes-Merton model.

Expected Term -Given the lack of historical experience, the expected term of options granted to employees was determined utilizing a plain vanilla approach whereby minimum or median time to vest and the contractual term of 10 years are averaged.

Risk-free Interest Rate -The yield was determined based on U.S. Treasury rates corresponding to the expected term of the underlying grants.

Dividend Yield -The Black-Scholes-Merton valuation model requires an expected dividend yield as an input. We currently do not anticipate paying dividends; therefore, the yield was estimated at zero.

The following table summarizes weighted-average assumptions used in our calculations of fair value for stock-option grants for the years ended December 31, 2024, and 2023:

During the year ended December 31, 2024, we granted stock options to purchase 770,000 shares of common stock at a weighted-average exercise price of $0.86 per share, which reflected the 30-day weighted fair market value of the shares on date of grant. In accordance with the terms of the Plan, the Board of Directors determined that the average of the high and low bid prices for the Common Stock reported daily on the OTCQB marketplace or Nasdaq, as applicable, on the grant date was the fair market value of the shares. The weighted-average fair value of options granted during the year ended December 31, 2024, as determined under the Black-Scholes-Merton valuation model was $0.57.

During the year ended December 31, 2023, we granted stock options to purchase 330,000 shares of common stock at a weighted-average exercise price of $0.39 per share, which reflected the 30-day weighted fair market value of the shares on date of grant. In accordance with the terms of the Plan, the Board of Directors determined that the average of the high and low bid prices for the Common Stock reported daily on the OTCQB marketplace or Nasdaq, as applicable, on the grant date was the fair market value of the shares. The weighted-average fair value of options granted during the year ended December 31, 2023, as determined under the Black-Scholes-Merton valuation model was $0.20.

The following table includes information with respect to stock option activity and stock options outstanding for the years ended December 31, 2024, and 2023:

*Aggregate intrinsic value includes only those options with intrinsic value (options where the exercise price is below the market price).

The following table summarizes non-vested stock options for the years ended December 31, 2024, and 2023:

The following table includes information concerning stock options exercisable and stock options expected to vest on December 31, 2024:

Restricted Stock

We have granted shares of restricted stock under the Plan. A restricted stock award is an issuance of shares that cannot be sold or transferred by the recipient until the vesting period lapses. Restricted shares issued to employees typically vest over two or three years in equal installments on the anniversaries of the grant date, contingent upon employment with the Company on the vesting dates. Occasionally, we also require recipients to meet certain performance criteria in addition to the vesting time period. The related compensation expense is recognized over the service period and is based on the grant date fair value of the stock and the number of shares expected to vest. For performance-based restricted stock grants, expense recognition begins only once we determine it is probable that the performance criteria will be met.

The fair value of restricted stock awarded for the years ended December 31, 2024, and 2023 was $1,539,525 and $598,770, respectively, and was calculated using the value of TSS’ common stock on the grant date. The value of awards is amortized over the vesting periods of the awards considering the effect of an estimated forfeiture rate of zero associated with termination behavior for the years ended December 31, 2024, and 2023, respectively.

The following table summarizes the restricted stock activity during the years ended December 31, 2024, and 2023:

Note 9–** Common Stock Repurchases**

During the years ended December 31, 2024, and 2023, we repurchased 753,810 and 104,711 treasury shares, respectively, with an aggregate value of approximately $4,485,000 and $40,000 respectively, associated with the vesting of restricted stock held by employees or upon the exercise of stock options held by employees. Per terms of the restricted stock agreements, for certain employees we paid the employees’ related taxes associated with the employees’ vested stock and decreased the freely tradable shares issued to the employee by a corresponding value, resulting in a share issuance net of taxes to the employee. The value of the shares netted for employee taxes represents treasury stock repurchased. Per terms of the stock option agreements, for certain employees we paid the exercise price of the stock option and decreased the freely tradable shares issued to the employee by a corresponding value, resulting in a share issuance, net of the exercise price to the employee.

Note 10–Related Party Transactions

We had no related party transactions in the years ended December 31, 2024 and 2023.

Note 11–Net Income Per-Share

Basic and diluted income per share is based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purpose of determining diluted income per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

The following table presents a reconciliation of the numerators and denominators of the basic and diluted income per share computations for income from continuing operations. In the table below, income represents the numerator, and shares represent the denominator (in thousands except per share amounts):

For the years ended December 31, 2024, and 2023, 2,126,000 and 3,226,000 potentially dilutive shares, respectively, were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive.

Note 12 - Segment Reporting

Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by our President and CEO, who is our chief operating decision-maker (CODM), in assessing performance, allocating resources and awarding incentive compensation. Prior to the fourth quarter of 2024, our activities were organized and managed in two reportable segments: facilities management and systems integration, with our procurement operating segment aggregated into the systems integration reportable segment. In the fourth quarter of 2024, we reorganized our structure such that our CODM now evaluates our operations and allocates resources on the basis of three segments. Accordingly, we have determined that we now have three reportable segments as noted below. Comparable prior period amounts presented have been recast to conform with the current period presentation, including the costs allocated to each reportable segment as provided to our CODM. With only an immaterial amount sourced from Canada in 2024, our revenues are substantially all derived from the U.S. market, and all revenues presented are from external customers; we have no intercompany revenues.

The Company’s reportable segments are as follows:

The CODM evaluates the performance of the segments based on segment revenue, gross profit and pre-tax income, including the significant expenses presented separately in the table below. Segment results are exclusive of certain activities and expenses that are not allocated to specific segments, and which are reconciled below to our consolidated pre-tax income.

When present, certain expenses within cost of revenue such as amortization of purchased intangibles and unusual and nonrecurring items are not allocated to specific segments. Therefore, these amounts are excluded from segment results and included in consolidated pre-tax income.

Other consolidated assets not specifically attributable to or allocated to business segments are principally cash and cash equivalents, prepaids and deposits, certain fixed assets, and operating lease right-of use assets.

Information regarding our reportable segments is presented below (in thousands):

The table below reconciles total segment pre-tax income for each period presented above to consolidated pre-tax income (in thousands):

The table below reconciles combined segment total assets for each period presented above to consolidated total assets (in thousands):