TSS, Inc.

Previous wording

Management’s Discussion and Analysis of Financial Condition and Result of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of TSS, Inc. and its subsidiaries (collectively “we”, “us”, “our”, TSS or the Company). The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2024 included in our 2024 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words“believe,”* “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the*“Risk Factors”* in Part 1, Item 1A of our 2024 Annual Report on Form 10-K for a discussion of items that may affect our future results.*

Current wording

Management’s Discussion and Analysis of Financial Condition and Result of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of TSS, Inc. and its subsidiaries (collectively “we”, “us”, “our”, TSS or the Company). The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2024 included in our 2024 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words“believe,”* “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the*“Risk Factors”* in Part 1, Item 1A of our 2024 Annual Report on Form 10-K for a discussion of items that may affect our future results.*

Previous wording

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 data center 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 the integration of Artificial Intelligence (AI) enabled data center server racks and componentry. TSS was incorporated in Delaware in December 2004. Our corporate offices and our integration facility are located in Round Rock, Texas.

Current wording

TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical data center 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. Beginning in 2024, our systems integration services have been enhanced to include integration of Artificial Intelligence (AI) enabled data center server racks. TSS was incorporated in Delaware in December 2004. We recently relocated our corporate offices and primary integration facility from Round Rock, Texas to Georgetown, Texas and continue to operate a second integration facility at our former corporate office in Round Rock, Texas.

Previous wording

Over the last ten years, we have optimized our business on providing world-class integration services to our customer base. As computing technologies evolve and as we see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our systems integration business to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM (original equipment manufacturer) strategic customer to win contracts and to provide business to us under a Master Relationship Agreement. A material decline in volume from, or loss of this OEM customer would have a material effect on our results. Our operational focus is to ensure this does not occur.

Current wording

Over the last ten years, we have optimized our business of providing world-class integration services to our customer base. As computing technologies evolve and as we see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our systems integration business to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM (original equipment manufacturer) strategic customer to win contracts and to provide business to us under a Master Relationship Agreement. A material decline in volume from, or loss of this OEM customer would have a material effect on our results. Our operational focus is to ensure this does not occur.

Previous wording

In October 2024, we signed a multi-year agreement with our largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. To support this level of production, and to be able to provide increased volumes over our existing facility, we are moving our headquarters and production facility to a new location in 2025 and anticipate capital expenditures of approximately $25 million to $30 million for improvements to that facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled (“DLC”) computer racks. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the planned capital expenditures, direct and indirect labor related to this activity, and all facility and related costs. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement with our customer provides reasonable assurance to us that absent our material breach of the agreement or our termination of the agreement, the revenues we earn from this arrangement will consistently be sufficient to cover the aforementioned costs we expect to incur in fulfilling our obligations. Our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, the other party would be relieved of any further obligation. Funding sources for the build-out costs at the new facility include approximately $6.8 million to be contributed by our landlord, $20 million from a construction loan from Susser Bank, and cash on hand for the remainder of the costs. The construction loan is expandable up to $25 million with bank approval. We borrowed no additional funds under that loan in the quarter ended March 31, 2025 and the outstanding principal balance remained $8.7 million throughout the three-month period. Subsequent to the quarter ended March 31, 2025, in May 2025 we borrowed the remaining $11.3 million available on the loan, which reimbursed us for capital expenditures we had previously funded using cash on hand.

Current wording

In October 2024, we signed a multi-year agreement with our largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. To support this level of production, and to be able to provide increased volumes over our prior facility, we have moved our headquarters and production facility to a new location in 2025. Through June 30, 2025, we have invested approximately $31.6 million in improvements to that leased facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled (“DLC”) computer racks. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the capital expenditures, direct and indirect labor related to this activity, and all facility and related costs. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement with our customer provides reasonable assurance to us that absent our material breach of the agreement or our termination of the agreement, the revenues we earn from this arrangement will consistently be sufficient to cover the aforementioned costs we expect to incur in fulfilling our obligations. Our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, the other party would be relieved of any further obligation. Funding sources for the build-out costs at the new facility include approximately $6.8 million to be contributed by our landlord, $20 million from a bank construction loan, and cash on hand for the remainder of the costs. The construction loan is expandable up to $25 million with bank approval. We borrowed $8.7 million on the loan on December 31, 2024 and drew down the remaining $11.3 million in May 2025, which reimbursed us for capital expenditures we had previously funded using cash on hand.

Previous wording

The volume of our strategic procurement services grew substantially in the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024. Customers value our ability to source disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported revenues will reflect only our fees earned in the transaction (“net deals”). If the procurement activities include integration services or other value-add work beyond just the procurement activity, the transaction is recorded at its gross value (“gross deals”), and revenue and costs are allocated to the procurement and systems integration segments based on the value created in each and the effort involved to fulfill the contracts.

Current wording

The volume of our strategic procurement services grew substantially in the quarter and six-month periods ended June 30, 2025 compared to the quarter and six-month periods ended June 30, 2024. Customers value our ability to source disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported revenues will reflect only our fees earned in the transaction (“net deals”). If the procurement activities include integration services or other value-add work beyond just the procurement activity, the transaction is recorded at its gross value (“gross deals”), and revenue and costs are allocated to the procurement and systems integration segments based on the value created in each and the effort involved to fulfill the contracts.

Previous wording

We contract with our customers under five primary contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price arrangements, which generally generate higher profit margins, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.

Current wording

We contract with our customers under various contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price arrangements, which generally generate higher profit margins, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.

Previous wording

Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with the use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability. Occasionally, our revenues will reflect certain reimbursements received from customers for expanding our capacity, typically through capital expenditure or for adding headcount to support specific customer requests. In 2024, we invested approximately $1.7 million in our Round Rock facility to expand our capacity to integrate generative AI-enabled server racks, including both air cooled and direct-liquid cooled systems. We received a reimbursement from one of our customers for the majority of those investments and are amortizing that reimbursement into service integration revenues over the expected useful life of three years. We are also depreciating those assets over the same three-year period.

Current wording

Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with the use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability. Occasionally, our revenues will reflect certain reimbursements received from customers for expanding our capacity, typically through capital expenditure or for adding headcount to support specific customer requests. In 2024, we invested approximately $1.7 million in our Round Rock facility to expand our capacity to integrate generative AI-enabled server racks, including both air cooled and direct-liquid cooled systems. One of our customers reimbursed us for the majority of those investments and we are amortizing that reimbursement into service integration revenues over the expected useful life of three years.

Previous wording

Our maintenance and integration services traditionally earn higher margins and maintenance contracts typically renew annually, providing consistency and predictability of revenues. We focus our design and project management services on smaller jobs typically connected with addition or retrofit activities to obtain better margins and a more predictable pattern of earnings than are typically seen when such efforts are concentrated in fewer high-value contracts for the construction of new data centers, which would otherwise require greater levels of working capital and tend to yield lower margins. We have also focused on providing maintenance services for modular data center applications as this market has expanded. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding revenue streams such as procurement services to help drive volume through the integration facility. The expansion into AI-enabled rack integration services which began in June 2024 bolstered both our revenues and our earnings, helping move the systems integration segment from a $0.1 million segment pre-tax loss in the prior year quarter to a $0.3 million segment contribution to pre-tax income in the current quarter, discussed in greater detail below. These amounts exclude certain corporate expenses, such as selling, general and administrative costs as well as facility costs and interest income that are not allocated to segments.

Current wording

Our maintenance and integration services traditionally earn higher margins and maintenance contracts typically renew annually, providing consistency and predictability of revenues. We focus our design and project management services on smaller jobs typically connected with addition or retrofit activities to obtain better margins and a more predictable pattern of earnings than are typically seen when such efforts are concentrated in fewer high-value contracts for the construction of new data centers, which would otherwise require greater levels of working capital and tend to yield lower margins. We have also focused on providing maintenance services for modular data center applications as this market has expanded. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding revenue streams such as procurement services to help drive volume through the integration facility.

Previous wording

Total revenues in the current quarter increased 523% to $99.0 million, driven primarily by significant growth in procurement and systems integration activities. Procurement revenues increased by $78.6 million (676%) and systems integration revenues increased by $5.4 million (253%). These increases were somewhat offset by a $0.8 million (40%) decrease in revenue from the facilities management segment.

Current wording

Total revenues in the current quarter increased 262% to $44.0 million, driven primarily by significant growth in procurement and systems integration activities. Procurement revenues increased by $28.1 million (572%) and systems integration revenues increased by $4.5 million (91%). These increases were somewhat offset by a $0.8 million (35%) decrease in revenue from the facilities management segment.

Previous wording

The $5.4 million (253%) increase in systems integration revenues was due primarily to the growth in integration of AI-enabled computer racks, which began with significant volume in June 2024. With the October signing of a multi-year agreement to continue integrating AI-enabled racks at certain minimum volumes, we expect systems integration revenues to remain significantly above the historical trend for several years. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required under the terms of this agreement, our customer could terminate the agreement if we were to materially breach it, leaving us with the financial obligations of the facility and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to our customer’s material breach of the agreement, they would be relieved of any further obligation. If the customer were to terminate the agreement for convenience, they would continue to be obligated to pay us for the monthly fixed charge, but would no longer have any minimum volume commitments, as discussed below.

Current wording

The $4.5 million (91%) increase in systems integration revenues was due primarily to the continued growth in integration of AI-enabled computer racks, which began with significant volume in June 2024. With the October 2024 signing of a multi-year agreement to continue integrating AI-enabled racks at certain minimum volumes, we expect for the next several years for systems integration revenues to continue at or above the elevated levels seen in the three most recent quarters. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required under the terms of this agreement, our customer could terminate the agreement if we were to materially breach it, leaving us with the financial obligations of the facility and debt service regardless of whether we have revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to our customer’s material breach of the agreement, they would be relieved of any further obligation. If the customer were to terminate the agreement for convenience, they would continue to be obligated to pay us for the monthly fixed charge, but would no longer have any minimum volume commitments, as discussed below.

Previous wording

The increase in procurement revenues was driven primarily by an increase in purchases from the federal government and a few large commercial enterprises including several individually large sales, combined with a mix shift with a greater proportion of the revenues coming from gross deals, as opposed to net deals. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some seasonality of these revenues. As the federal government budget ends on September 30 each year, we believe this may generally lead to an increase in procurement revenues in the quarter ending September 30 each year and again in the quarter ending December 31 as federal agencies receive their budgets for the new year. However, we cannot accurately predict when other large procurement activity will occur, such as the large purchases from our customers’ enterprise clients in the current quarter.

Current wording

The increase in procurement revenues was driven primarily by an increase in purchases from the federal government, combined with a mix shift with a greater proportion of the revenues coming from gross deals, as opposed to net deals. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some variability of these revenues from quarter to quarter. We cannot accurately predict when government-related or other large enterprise procurement activity will occur.

Previous wording

Due to the lighter effort required to execute procurement transactions, the gross margins are thinner in that line of business. As a result, increases and decreases in that business have a smaller impact on our overall margins and profitability compared to increases in the facilities management or systems integration lines of business. The following table presents the results of our procurement activities, both in terms of the gross value of the transactions, regardless of whether they were recorded as gross deals or net deals, along with the recorded values, to aid in an analysis of the underlying economics (unaudited, in thousands, except percentages):

Current wording

Due to the lighter effort required to execute procurement transactions, the gross margins are less robust in that line of business. As a result, increases and decreases in that business have a smaller impact on our overall margins and profitability compared to increases in the facilities management or systems integration lines of business. The following table presents the results of our procurement activities, both in terms of the gross value of the transactions, regardless of whether they were recorded as gross deals or net deals, along with the recorded values, to aid in an analysis of the underlying economics (unaudited, in thousands, except percentages):

Previous wording

The gross value of all procurement transactions increased 431% from the prior year quarter, from $20.0 million to $106.0 million in the current quarter. The majority of the current quarter’s procurement transactions were gross deals, whereas a greater portion of the prior year quarter’s transactions were net deals, in which we record only our agent fee as revenues. As a result, the recorded revenue increased from $11.6 million in the prior year quarter to $90.2 million in the current quarter. Gross profit recognized on all procurement transactions increased 674% from $0.9 million to $7.0 million before interest charges. After netting related interest charges and other operating expenses, the procurement segment’s contribution to pre-tax income increased 807% from $0.6 million to $5.7 million in the current quarter.

Current wording

The gross value of all procurement transactions increased 213% from the prior year quarter, from $21.0 million to $65.7 million in the current quarter. The majority of the current quarter’s procurement transactions were gross deals, whereas a greater portion of the prior year quarter’s transactions were net deals, in which we record only our agent fee as revenues. As a result, the recorded revenue increased from $4.9 million in the prior year quarter to $33.0 million in the current quarter. Gross profit recognized on all procurement transactions increased 256% from $0.7 million to $2.5 million before interest charges.

Previous wording

Although the margins are thinner than our other lines of business, efforts required to support the procurement business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-selling opportunities for higher yielding integration services, so we continue to view this business as a growth vehicle. As mentioned previously, the procurement business can fluctuate widely from quarter to quarter, and the recorded revenues can fluctuate even more widely if there is a substantial shift between gross and net deals, even if the underlying economics between the two are relatively similar.

Current wording

Although the margins are less robust than our other lines of business, efforts required to support the procurement business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-selling opportunities for higher yielding integration services, so we continue to view this business as a growth vehicle. As mentioned previously, the procurement business can fluctuate widely from quarter to quarter, and the recorded revenues can fluctuate even more widely if there is a substantial shift between gross and net deals, even if the underlying economics between the two are relatively similar.

Previous wording

Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expenses, equipment and other costs associated with our test and integration facilities, excluding depreciation of our manufacturing property and equipment, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. Our consolidated gross margin was 9% for the current quarter compared to 17% for the prior year quarter. The blended decrease was driven primarily by the outsized increase in the lower margin procurement business in relation to the remainder of the organization. Gross margins for the current quarter were 8% for the procurement business, 22% for the systems integration business, and 41% for the facilities management activities. In the prior year quarter, gross margins were 8% for the procurement business, 28% for the systems integration business and 56% for the facilities management business.

Current wording

Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expenses, equipment and other costs associated with our test and integration facilities, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. Our consolidated gross margin was 18% for the current quarter compared to 37% for the prior year quarter. The blended decrease was driven primarily by the outsized increase in the lower margin procurement business in relation to the remainder of the organization. Gross margins for the current quarter were 8% for the procurement business, 44% for the systems integration business, and 74% for the facilities management business. In the prior year quarter, gross margins were 15% for the procurement business, 43% for the systems integration business and 74% for the facilities management business.

Previous wording

Selling, general and administrative expenses consist primarily of compensation and related expenses, including sales commissions and other incentive compensation for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurance and other corporate costs. As a percentage of gross profit, SG&A fees improved from 88% in the prior year quarter to 53% in the current quarter, effectively leveraging this cost in relation to the overall growth in the Company’s operations. In dollar terms, our SG&A expenses increased by $2.5 million (105%) in the current quarter compared to the prior year quarter primarily due to higher headcount and related compensation costs to support the growing scale of the organization combined with higher accruals for incentive compensation tied directly to the improvements in sales and earnings.

Current wording

Selling, general and administrative expenses consist primarily of compensation and related expenses, including sales commissions and other incentive compensation for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, insurance and other corporate costs. As a percentage of gross profit, our SG&A costs in the current quarter are 61% compared to 60% of gross profit in the prior year quarter. In dollar terms, our SG&A expenses increased by $2.0 million in the current quarter compared to the prior year quarter primarily due to higher headcount and related compensation costs to support the growing scale of the organization combined with higher accruals for incentive compensation tied directly to the improvements in sales and earnings. Also included in the current quarter are incremental costs for the 2024 annual audit, incentive compensation and personal property taxes, each of which exceeded our estimates recorded in prior periods. The current quarter’s SG&A expenses include $0.9 million of non-cash equity-based compensation compared to $0.2 million in the prior year quarter.

Previous wording

Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.4 million compared to $0.1 million earned in the prior year quarter.

Current wording

Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.2 million compared to $0.1 million earned in the prior year quarter.

Previous wording

In the current quarter, we recorded interest expense of $1.5 million compared to $0.3 million in the prior year quarter. The increase was due primarily to the increase in the gross value of procurement transactions and other revenues from our primary customer in the current quarter compared to the prior year quarter. The factoring charge we incur is based on the total gross value of transactions with that customer, including the gross value of procurement deals whether we account for such deals as gross or net deals. Included in interest expense is $0.2 million of interest expense on our outstanding bank debt. There was no bank debt interest in the prior year quarter as no borrowings were outstanding in that period.

Current wording

In the current year-to-date period, we recorded interest expense of $2.3 million compared to $0.7 million in the prior year-to-date period. The increase was due to the increase in the gross value of procurement transactions and other revenues from our primary customer in the current period compared to the prior year-to-date period, combined with the interest on our outstanding construction loan, whereas we had no outstanding debt in the prior year period. The factoring charge we incur is based on the total gross value of transactions with our largest customer, including the gross value of procurement deals whether we account for such deals as gross or net deals.

Previous wording

After a small increase in income taxes related to our improved operating results, we recorded a net income of $3.0 million, or $0.12 per diluted share for the quarter ended March 31, 2025, compared to a net income of $15,000, or $0.00 per diluted share in the prior year quarter.

Current wording

After a $0.1 million increase in income taxes related to our improved year-to-date operating results, our current year-to-date net income was $4.5 million, or $0.17 per diluted share, compared to a net income of $1.4 million, or $0.06 per diluted share in the prior year-to-date period.

Previous wording

Our primary sources of liquidity at March 31, 2025 are our cash and cash equivalents on hand, funds available under our construction loan and projected cash flows from operating activities.

Current wording

Our primary sources of liquidity at June 30, 2025 are our cash and cash equivalents on hand, vendor trade-credit, projected cash flows from operating activities and approximately $6.8 million of tenant improvement funds we expect to collect from our landlord once all construction lien waivers are received. Subject to bank approval, we may also exercise an accordion feature on our construction loan to increase the borrowings on that loan by up to $5.0 million beyond the $20.0 million borrowed at June 30, 2025. In the past two years, we have also received certain reimbursements from our largest customer to help us expand our capacity to serve them and could receive similar reimbursements in future periods if they ask us to expand to even greater capacity.

Previous wording

As discussed above, we signed a multi-year agreement in 2024 to integrate an expected minimum weekly volume of AI-enabled computer racks for several years. Due to the increasing power and cooling demands expected in upcoming generations of those racks, we leased and plan to move to a new facility which can provide sufficient power for the foreseeable future. The new facility is almost 213,000 square feet compared to the 105,000 square foot leased facility in which we currently operate. We are in the process of building out the new facility and expect to invest a total of $25 million to $30 million, including expenditures made to date. Through March 31, 2025, we have funded approximately $8.4 million of those costs with bank debt and $14.8 million with cash on hand. We expect to invest the remainder in the second fiscal quarter of 2025. On December 31, 2024, we consummated a construction loan with Susser Bank for up to $20 million, expandable in certain circumstances to $25 million, and immediately drew down $8.7 million, with $8.4 million reimbursing us for previously spent funds and the remainder covering loan closing costs. At the same time, we also placed $5.0 million cash into a money market account securing the loan. Once construction is completed, the outstanding balance will be converted to a fully amortizing term loan with a maturity date roughly approximating the term of the multi-year AI rack integration agreement we signed with our OEM customer. We anticipate receiving funds from our customer sufficient to offset the debt service for the full term of this debt and the majority of the costs to operate the new facility as most of that facility will be dedicated to that activity. We have not yet determined whether we will be able to secure additional business to utilize both facilities. If not, we will likely seek to sublease our existing 105,000 square foot facility in Round Rock, Texas but may incur the costs and cash demands of two facilities for some indeterminate period of time. We did not make any additional draws on the construction loan in the quarter ended March 31, 2025, funding the $14.9 million of capital expenditures in the quarter with cash on hand. Subsequent to the end of the current quarter, on May 5, 2025, we borrowed the remaining $11.3 million available on the construction loan, reimbursing us for a portion of the capital expenditures paid in cash and bringing total borrowed funds to $20.0 million.

Current wording

As discussed above, we signed a multi-year agreement in 2024 to integrate an expected minimum weekly volume of AI-enabled computer racks for several years. Due to the increasing power and cooling demands expected in upcoming generations of those racks, we leased a new facility in Georgetown, Texas which can provide sufficient power for the foreseeable future and began operations in that facility in May 2025. The new facility is almost 213,000 square feet compared to the 105,000 square foot leased facility in which we previously operated. Through June 30, 2025, we have invested approximately $31.6 million in that facility, funded with a $20 million construction loan and cash on hand. In the current year-to-date period, we borrowed the remaining $11.3 million available on the construction loan beyond the $8.7 million that was outstanding at the beginning of the year. On July 5, 2025, the outstanding $20.0 million balance converted to a fully amortizing term loan with a maturity date of January 5, 2030. The monthly payment will vary somewhat as the loan bears a floating interest rate, with monthly principal and interest payments of approximately $437,000 beginning in August 2025. We anticipate receiving funds from our customer sufficient to offset the debt service for the full term of this debt and the majority of the costs to operate the new facility as most of that facility will be dedicated to that activity. If we are unable to sublease our prior 105,000 square foot facility, we may incur the costs of two facilities for a period of time.

Previous wording

As of March 31, 2025 and December 31, 2024, we had cash and cash equivalents of $27.3 million and $23.2 million, respectively. Of the cash held at both dates, $5.0 million is held in a money market account as collateral against our outstanding bank debt and therefore is not immediately accessible other than to use for repayment of the debt.

Current wording

As of June 30, 2025 and December 31, 2024, we had cash, cash equivalents and restricted cash of $41.8 million and $23.2 million, respectively. At both dates, $5.0 million of that amount was held in a money market account as collateral against our outstanding bank debt and therefore is not immediately accessible other than to use for repayment of the debt.

Previous wording

Cash provided by operating activities was $20.6 million in the current quarter, compared to $2.6 million in the prior year quarter. This change in cash provided by operating activities was primarily attributable to the significant increase in contribution from the AI-rack integration services combined with the financial impacts of our procurement services and the large increase in procurement services near the end of the current quarter for which we have already been paid under our factoring program but for which we have not yet had to pay our vendors.

Current wording

Cash provided by operating activities was $37.0 million in the current year-to-date period, compared to a use of $1.7 million in the prior year-to-date period. This change in cash provided by operating activities was primarily attributable to the significant increase in contribution from the AI-rack integration services combined with the financial impacts of our procurement services and the large increase in procurement services near the end of the current period for which we have already been paid under our factoring program but for which we have not yet had to pay our vendors.

Previous wording

Accounts payable increased $12.9 million in the current quarter. Somewhat offsetting this was an increase of $5.1 million in contract and other receivables and a $2.7 million growth in inventories in the current quarter largely related to procurement activities ongoing at quarter-end, and to a smaller degree to support our growth in the integration services business. Changes in our receivables, inventory, accounts payable and deferred revenues during the current quarter are attributable primarily to the timing of procurement transactions. We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary means to finance these activities. However, due to timing it is possible to see fluctuations on a quarterly or annual basis for procurement contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit available to us to continue financing our procurement activities as we grow this business during 2025 and beyond. These changes were further enhanced by the $3.0 million of net income in the current quarter vs. net income of $15,000 in the prior year quarter.

Current wording

Primarily driving the operating cash flow in the current period was a $26.8 million increase in accounts payable, combined with a $3.1 million decrease in inventory on hand and $4.0 million in favorable movements of other operating assets and liabilities, net of cash uses for the $3.6 million change in costs and estimated earnings in excess of billings on uncompleted contracts and a $0.7 million increase in prepaid assets and other assets, primarily for the payment of annual insurance premiums. Changes in our receivables, inventory, and accounts payable during the current period are attributable primarily to the timing of procurement transactions, with some of the accounts payable increase also related to construction costs. We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary means to finance these activities. However, due to timing it is possible to see fluctuations on a quarterly or annual basis for procurement contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit available to us to continue financing our procurement activities as we grow this business during 2025 and beyond. These changes were further enhanced by the $4.5 million net income in the current year-to-date period vs. net income of $1.4 million in the prior year-to-date period.

Previous wording

We invested $14.9 million in the quarter ended March 31, 2025 primarily in the ongoing buildout of our new leased integration facility and headquarters. These costs are largely for enhancements to our electrical and cooling systems to support our growth in AI-enabled rack integration. This compares to only $39,000 invested in capital assets in the prior year quarter.

Current wording

We invested $25.8 million of cash in the six months ended June 30, 2025 primarily in the buildout of our new leased integration facility and headquarters. These costs are largely for enhancements to our electrical and cooling systems to support our growth in AI-enabled rack integration. This compares to only $1.7 million invested in capital assets in the prior year-to-date period.

Previous wording

Financing activities used $1.6 million in the current quarter and $55,000 in the prior year quarter. In both periods, the expenditure was to repurchase stock from employees. To minimize dilution to our shareholders, we generally allow employees to “net settle” upon the vesting of restricted stock and upon stock option exercises, allowing them to forfeit a portion of the shares sufficient to cover their tax obligation and the option exercise price, and we then use the Company’s cash to pay the taxes. None of the share repurchases were open-market transactions and there is no approved share buyback program in place other than allowing employees to net settle.

Current wording

In the current period, loan proceeds to fund our construction provided $11.3 million of cash, offset by $3.9 million used to repurchase treasury stock from employees, for net cash inflows from financing activities of $7.4 million. This compares to $0.1 million of cash used in the prior year-to-date period to repurchase treasury stock from employees. To minimize dilution to our shareholders, we generally allow employees to “net settle” upon the vesting of restricted stock and upon stock option exercises, allowing them to forfeit a portion of the shares sufficient to cover their tax obligation and the option exercise price, and we then use the Company’s cash to pay the employee’s taxes. None of the share repurchases were open-market transactions and there is no approved share buyback program in place other than allowing employees to net settle.

Previous wording

Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues may not meet our expectations or our costs may exceed our estimates. Further, our estimates may change and future events or developments may also affect our estimates. Any of these factors may change our expectations of cash usage during 2025 and beyond or significantly affect our level of liquidity, which may require us to take other measures to raise funds or reduce our operating costs in order to continue operating. Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially impact our financial results depending on the level of cost reductions taken.

Current wording

Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues may not meet our expectations and our costs may exceed our estimates. Further, our estimates may change and future events or developments may affect our estimates. Any of these factors may change our expectations of cash usage during 2025 and beyond or significantly affect our level of liquidity, which could require us to take other measures to raise funds or reduce our operating costs in order to continue operating. Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially affect our financial results depending on the level of cost reductions taken.

Previous wording

Our primary liquidity and capital requirements are to fund working capital from current operations and to fund the remaining planned investment in our new facility. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand and funds generated from operations including the funds from our customer financing program, combined with the construction loan to finance the investment in our new facility. We believe that if future results do not meet expectations, 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. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses, further expand our facility, or operate both facilities.

Current wording

Our primary liquidity and capital requirements are to fund working capital from current operations including the elevated level of accounts payable related to our procurement activities and construction costs, and to fund the repurchase of treasury shares from employees upon option exercises or vesting of restricted stock to allow them to cover their tax liabilities. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand and funds generated from operations including the funds from our customer financing program, combined with the potential $5.0 million accordion feature on our construction loan to finance the investment in our new facility, as well as $6.8 million of tenant improvements from our landlord following receipt of all lien waivers on our construction. We believe that if future results do not meet expectations, 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. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses, further expand our facility, or operate both facilities.