TSS, Inc.

Previous 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.

Current wording

TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex AI technologies, planning, design, deployment, maintenance and refresh 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. 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.

Previous wording

We support a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDCs), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more advanced computing and storage capacity. In recent years, these enterprises have shifted their investment priorities towards AI and accelerated computing infrastructure initiatives. Enterprise and data center operators are facing immense pressure to rapidly integrate and deploy the latest generative AI equipment and GPUs (Graphics Processing Units) and will need to adapt these next-generation servers and custom rack-scale architectures to quickly and successfully compete in the market. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.

Current wording

We deliver complex solutions to a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDCs), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more advanced computing and storage capacity. In recent years, these enterprises have shifted their investment priorities towards AI and accelerated computing infrastructure initiatives. Enterprise and data center operators are facing immense pressure to rapidly integrate and deploy the latest generative and inferencing AI equipment and GPUs (Graphics Processing Units) and will need to adapt these next-generation servers and custom rack-scale architectures to quickly and successfully compete in the market. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.

Previous 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.

Current wording

Over the last ten years, we have optimized our business by 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 and capabilities 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

Most of the components used in our systems integration business are consigned to us by our largest OEM customer or its end-user customers. Thus, our revenues reflect only the services we provide, and the consigned components are not reflected in our income statement or on our balance sheet. We also offer our customers procurement services whereby we procure third-party hardware, software and services on their behalf. Our configuration and integration services businesses often integrate these components to deliver a complete system to our customers.

Current wording

Most of the components used in our systems integration business are consigned to us by our largest OEM customer or its end-user customers. Thus, our revenues reflect only the services we provide, and the consigned components are not reflected in our statement of operations or on our balance sheet. We also offer procurement services whereby we procure third-party hardware, software and services on their behalf. Our configuration and integration services businesses often integrate these components to deliver a complete system to our customers.

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 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.

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 moved our headquarters and production facility to a new location in May 2025. Through September 30, 2025, we have invested approximately $35.1 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 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 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, $25 million from a bank term loan, and cash on hand for the remainder of the costs. We expect to receive the $6.8 million from our landlord in the fourth quarter of 2025 and borrowed the final $5 million under the term loan in August 2025. Those funds 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 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.

Current wording

The volume of our strategic procurement services grew substantially in the nine-month periods ended September 30, 2025 compared to the nine-month periods ended September 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

Revenues consist of fees earned from planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenues from providing system configuration and integration services, and procurement services, to IT equipment vendors. We began integration services on AI racks in June 2024 and have continued with that activity throughout the current quarter. Currently we derive all our revenue from the U.S. market.

Current wording

Revenues consist of fees earned from planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenues from providing system configuration and integration services, and procurement services, to IT equipment vendors. We began integration services on AI racks in June 2024 and have continued with that activity throughout the current quarter. Currently we derive substantially all our revenue from the U.S. market.

Previous 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.

Current wording

We contract with our customers with 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. 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.

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 systems integration revenues over the expected useful life of three years.

Previous 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.

Current wording

The $1.6 million (20%) 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, and an increase in certain fixed monthly fees as we became fully operational in our new Georgetown facility. 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 revenue 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

In addition to the fixed monthly fees to which we are entitled under that agreement, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business, our primary customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we do not meet the minimum weekly volume due to our production downtime or labor shortages compared to agreed-upon levels, we will reduce the fee, billing only for the quantity of racks we actually configured or could have configured given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. While any reduction in available staff reduces the revenues to which we are entitled under this agreement, we believe our long-term partnership with our customer is strengthened as we help them mitigate a portion of the costs for which they would otherwise be responsible. The periodic reduction of revenues has a muted impact on our overall results, as we also reduce our labor costs in line with the reduced revenues.

Current wording

In addition to the fixed monthly fees to which we are entitled under that agreement, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business, our primary customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we do not meet the minimum weekly volume due to our production downtime or labor shortages compared to agreed-upon levels, we will reduce the fee, billing only for the quantity of racks we configured or could have configured given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. While any reduction in available staff such as seen in the current quarter reduces the revenues to which we are entitled under this agreement, we believe our long-term partnership with our customer is strengthened as we help them mitigate a portion of the costs for which they would otherwise be responsible. The periodic reduction of revenues has a muted impact on our overall results, as we also reduce our labor costs in line with the reduced revenues.

Previous 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.

Current wording

The gross value of all procurement transactions decreased 40% from the prior year quarter, from $80.0 million to $48.1 million in the current quarter. Gross profit recognized on all procurement transactions decreased 30% from $3.7 million to $2.6 million before interest charges.

Previous 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.

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.

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, 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.

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, the costs of support functions such as purchasing, logistics and quality assurance, and depreciation of fixed assets directly related to our revenue-producing operations. Our consolidated gross margin remained consistent with the prior year quarter at 11%. Gross margins for the current quarter were 8% for the procurement business, 13% for the systems integration business, and 55% for the facilities management business. In the prior year quarter, gross margins were 6% for the procurement business, 45% for the systems integration business and 37% 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, 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.

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, equity-based compensation, professional fees, facility costs, insurance and other corporate costs. Our SG&A expenses increased by $1.4 million in the current quarter compared to the prior year quarter. Approximately half of the increase was due to an increase in non-cash equity-based compensation. The remainder increased 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 year-to-date improvements in sales and earnings. Also included in the current quarter are incremental costs for the 2025 annual audit and ongoing SOX 404(b) implementation.

Previous wording

Operating income was $2.2 million in the current quarter compared to $1.7 million in the prior year quarter. Although gross profit increased 72% in the current quarter, the operating expenses, comprised of higher SG&A and depreciation and amortization increased by 97%, leading to the net 32% improvement in operating income. As revenues continue to ramp at the new factory and SG&A costs moderate, we anticipate operating income in the final six months of 2025 will exceed the comparable period of 2024. If we are successful in subleasing our prior Round Rock, Texas facility, that will further enhance our operating income in future periods.

Current wording

We recognized an operating loss of $0.9 million in the current quarter compared to operating income of $3.8 million in the prior year quarter. The majority of this loss is attributable to the incremental operations related depreciation and fixed electrical power costs in advance of the expected incremental revenues, as well as the timing of revenue projects and increased SG&A expenses as described above. As revenues continue to ramp at the new factory and SG&A costs moderate, we anticipate operating income in the final three months of 2025 will exceed the comparable period of 2024. If we are successful in subleasing our prior Round Rock, Texas facility, that will further enhance our operating income in future periods.

Previous wording

In the current quarter, we recorded interest expense of $0.9 million compared to $0.4 million in the prior year quarter. The increase was due 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, combined with the interest on our outstanding $20.0 million construction loan, whereas we had no outstanding debt in the prior year quarter. 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. During the current quarter, we borrowed the remaining $11.3 million of our available construction loan, increasing the outstanding principal balance from $8.7 million to $20.0 million.

Current wording

In the current quarter, we recorded interest expense of $1.0 million compared to $1.3 million in the prior year quarter. The decrease was due to the decrease 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 our largest customer, including the gross value of procurement deals, whether we account for such deals as gross or net deals. During the current quarter we exercised the $5.0 million accordion feature on our existing term loan, increasing the outstanding debt on which interest accrues by that amount.

Previous 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.

Current 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 $0.2 million earned in the prior year quarter. The cash balance increased approximately $55.3 million as a result of our stock offering completed in August 2025, as described below in Liquidity and Capital Resources.

Previous wording

After a $0.1 million charge for income taxes, our net income was $1.5 million, or $0.06 per diluted share in the current quarter, compared to $1.4 million, or $0.06 per diluted share in the prior year quarter.

Current wording

After a $0.1 million charge for income taxes, our net loss was $1.5 million, or $0.06 per diluted share in the current quarter, compared net income of $2.6 million, or $0.10 per diluted share in the prior year quarter. We anticipate returning to profitability in the fourth quarter of 2025 as we begin to realize incremental revenues stemming from our recent investments in our facility and access to additional electrical power.

Previous wording

Unless otherwise noted, all comparisons in this section are between the six-month period ended June 30, 2025 (the “current year-to-date period” or “current period”) and the six-month period ended June 30, 2024 (the “prior year-to-date period,” “prior year period” or “this period last year”).

Current wording

Unless otherwise noted, all comparisons in this section are between the nine-month period ended September 30, 2025 (the “current year-to-date period” or “current period”) and the nine-month period ended September 30, 2024 (the “prior year-to-date period,” “prior year period” or “this period last year”).

Previous wording

Total revenues in the current year-to-date period increased 410% to $142.9 million, driven primarily by significant growth in our two largest segments - procurement and systems integration. Procurement revenues increased by $106.6 million (645%) and systems integration revenues increased by $9.9 million (140%). These increases were somewhat offset by a $1.7 million (37%) decrease in revenue from the facilities management segment, primarily due to the timing of discrete projects in the facilities management business and a smaller decrease in ongoing maintenance revenues.

Current wording

Total revenues in the current year-to-date period increased 88% to $184.8 million, driven primarily by significant growth in our two largest segments - procurement and systems integration. Procurement revenues increased by $77.3 million (100%) and systems integration revenues increased by $11.4 million (78%). These increases were somewhat offset by a $2.0 million (32%) decrease in revenue from the facilities management segment, primarily due to the timing of discrete projects in the facilities management business and a smaller decrease in ongoing maintenance revenues.

Previous wording

The $9.9 million (140%) 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.

Current wording

The $11.4 million (78%) 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.

Previous wording

The gross value of all procurement transactions increased 319% from the prior year-to-date period, from $40.9 million to $171.7 million in the current year-to-date period. The majority of the current period’s procurement transactions were gross deals, whereas a greater portion of the prior year period’s transactions were net deals, in which we record only our agent fee as revenues. As a result, the recorded revenue increased from $16.5 million in the prior year period to $123.2 million in the current year period. Gross profit recognized on all procurement transactions increased 490% from $1.6 million to $9.6 million before interest charges.

Current wording

The gross value of all procurement transactions increased 82% from the prior year-to-date period, from $120.6 million to $219.8 million in the current year-to-date period. The majority of the current period’s procurement transactions were gross deals, whereas a greater portion of the prior year period’s transactions were net deals, in which we record only our agent fee as revenues. As a result, the recorded revenue increased from $77.0 million in the prior year period to $154.3 million in the current year period. Gross profit recognized on all procurement transactions increased 127% from $5.4 million to $12.1 million before interest charges.

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, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. Our consolidated gross margin was 12% for the current year-to-date period compared to 26% for the prior year-to-date period. 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 year-to-date period were 8% for the procurement business, 34% for the systems integration business, and 59% for the facilities management business. In the prior year-to-date period, gross margins were 10% for the procurement business, 39% for the systems integration business and 65% 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, the costs of support functions such as purchasing, logistics and quality assurance, and depreciation of fixed assets directly related to our revenue-producing operations. Our consolidated gross margin decreased from 15% in the prior year-to-date period to 12% in the current year-to-date. Gross margins for the current year-to-date period were 8% for the procurement business, 24% for the systems integration business, and 57% for the facilities management business. In the prior year-to-date period, gross margins were 7% for the procurement business, 42% for the systems integration business and 57% for the facilities management business.

Previous wording

As a percentage of gross profit, our SG&A expenses in the current year-to-date period improved to 57% from 70% of gross profit in the prior year-to-date period. In dollar terms, our SG&A expenses increased by $4.5 million (88%) in the current year-to-date period 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. Included in the current period are incremental costs for the 2024 annual audit, incentive compensation and personal property taxes that exceeded our estimates recorded in prior periods. The current year-to-date period’s SG&A expenses include $1.8 million of non-cash equity-based compensation compared to $0.3 million in the prior year-to-date period.

Current wording

Our SG&A expenses increased by $5.9 million (65%) in the current year-to-date period. Of the total increase, $2.3 million is from non-cash equity-based compensation, with the remainder primarily from 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. We had further increased expenses related to non-capitalizable costs associated with the continued buildout of the Georgetown, Texas facility and increased utility expenses. Included in the current period are incremental costs for the 2025 annual audit and costs associated with our preparation of SOX 404(b) readiness.

Previous 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.

Current wording

In the current year-to-date period, we recorded interest expense of $3.3 million compared to $2.0 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

Due primarily to the higher average balance of cash on hand in the current year-to-date period, interest income increased to $0.6 million compared to $0.2 million earned in the prior year-to-date period.

Current wording

Due primarily to the higher average balance of cash on hand in the current year-to-date period, interest income increased to $1.0 million compared to $0.4 million earned in the prior year-to-date period. The cash balance increased approximately $55.3 million as a result of our stock offering completed in August 2025, as described below in Liquidity and Capital Resources.

Previous 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.

Current wording

After a $0.1 million increase in income taxes, our current year-to-date net income was $3.0 million, or $0.11 per diluted share, compared to a net income of $4.1 million, or $0.16 per diluted share in the prior year-to-date period.

Previous 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.

Current wording

Our primary sources of liquidity at September 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 in the fourth quarter of 2025 as all prerequisite conditions have been met and approved by the landlord. 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 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.

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 September 30, 2025, we have invested approximately $35.1 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. In September 2025 we exercised the accordion feature of that loan, borrowing an additional $5.0 million, bringing the total gross value borrowed to $25.0 million, better aligning our long-term facility with long-term financing. The accordion feature has all the same terms and conditions as the existing term loan, and the two loans are coterminous. 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 used in 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 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.

Current wording

As of September 30, 2025 and December 31, 2024, we had cash, cash equivalents and restricted cash of $75.7 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

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.

Current wording

Cash provided by operating activities was $19.1 million in the current year-to-date period, compared to $36.9 million in the prior year-to-date period. This change in cash provided by operating activities was primarily attributable to the significant increase in accounts payable in the prior period of $37.6 compared to the decrease in accounts payable in the current year-to-date period of $4.8 million offset by an $8.2 million higher increase in deferred revenues in the current period and an $8.1 million greater increase in the right-of-use asset period-over-period. In the current year-to-date period, we also decreased our held inventory by $6.4 million, whereas we invested $2.6 million in inventory growth in the prior year-to-date period. 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 decrease related to construction costs recognized in the prior period coming due. 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.

Previous 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.

Current wording

We invested $32.7 million of cash in the nine months ended September 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 $1.8 million invested in capital assets in the prior year-to-date period.

Previous 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.

Current wording

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, if applicable, 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 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.

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 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 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.

Current wording

Our primary liquidity and capital requirements are to fund working capital from current operations 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. 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.