TSS, Inc.

Previous wording

We provide a comprehensive suite of services for the integration of complex Artificial Intelligence (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 AI enabled data center server racks. TSS was incorporated in Delaware in December 2004.

Current wording

We provide a comprehensive suite of services for the integration of complex Artificial Intelligence (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 and the warehousing of parts integral to those services, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services were enhanced to include integration of AI enabled data center server racks as compared to traditional network, storage and CPU-based compute racks. That expansion of our service offerings necessitated a larger investment in fixed assets for the electrical power and cooling required by AI enabled racks, and drove a related significant increase in revenues from our systems integration segment. AI rack integration continues to be a key growth contributor to our revenues and earnings.

Previous wording

In October 2024, we signed a long-term 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 March 31, 2026, we have invested approximately $40 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. In December 2025, we signed an amendment to the long-term agreement whereby both parties agreed to extend the term of the agreement for an additional two years beyond its original multi-year term, with automatic one-year renewals if not earlier terminated, and to provide pricing updates to account for increased power consumption and capital expenditures beyond the original expectations. 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 contributed by our landlord, $25 million from two related bank term loans, and cash on hand. In December 2025, we repaid the second $5 million bank loan, and our current loan balance reflects the remaining balance on only the original $20 million loan.

Current wording

In October 2024, we signed a long-term 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 June 30, 2026, we have invested approximately $48 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. In December 2025, we signed an amendment to the long-term agreement whereby both parties agreed to extend the term of the agreement for an additional two years beyond its original multi-year term, with automatic one-year renewals if not earlier terminated, and to provide pricing updates to account for increased power consumption and capital expenditures beyond the original expectations. 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 contributed by our landlord, $25 million from two related bank term loans, and cash on hand. In December 2025, we repaid the second $5 million bank loan, and our current loan balance reflects the remaining balance on only the original $20 million loan.

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 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 expenditures, 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. Prior to December 2025, we were amortizing that reimbursement into service integration revenues over the expected useful life of three years; the same period over which we were depreciating the related fixed assets. As the production of AI racks has now fully moved to our Georgetown facility and we no longer expect to utilize the assets installed in our Round Rock facility to support AI rack integration, we accelerated the revenue recognition and depreciation of those assets in the fourth quarter of 2025.

Current wording

Most of our revenue is generated based on services provided by either 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 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 expenditures, 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. Prior to December 2025, we were amortizing that reimbursement into service integration revenues over the expected useful life of three years; the same period over which we were depreciating the related fixed assets. As the production of AI racks has now fully moved to our Georgetown facility and we no longer expect to utilize the assets installed in our Round Rock facility to support AI rack integration, we accelerated the revenue recognition and depreciation of those assets in the fourth quarter of 2025.

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 MDC 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.

Current wording

Our maintenance and integration services traditionally earn higher margins relative to our other service offerings, 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 MDC 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

In April 2026, we signed an agreement with our largest customer to use our idle Round Rock, Texas facility to provide warehousing, fulfillment and transportation services, primarily for inventory parts that are integral to the AI rack integration services we provide to that same customer. The agreement calls for us to provide such services, including transportation of parts from that facility to our Georgetown, Texas integration facility as needed, beginning May 1, 2026. The term of the agreement runs through the expiration of our lease at that facility on March 31, 2029, and includes the potential of extensions beyond that date if both parties agree. The agreement calls for both fixed and variable revenues which we expect to contribute to the Company’s overall income beginning in the second quarter of 2026.

Current wording

In April 2026, we signed an agreement with our largest customer to use our idle Round Rock, Texas facility to provide warehousing, fulfillment and transportation services, primarily for inventory parts that are integral to the AI rack integration services we provide to that same customer. The agreement calls for us to provide such services, including transportation of parts from that facility to our Georgetown, Texas integration facility as needed, which began May 1, 2026. The term of the agreement runs through the expiration of our lease at that facility on March 31, 2029, and includes the potential of extensions beyond that date if both parties agree. The agreement calls for both fixed and variable revenues which contributed to the Company’s overall income beginning in the second quarter of 2026. Although we did not legally sublease our facility to our customer, following the guidance of ASC 842, we determined that a portion of the agreement represents an embedded lease. Accordingly, the portion of customer charges deemed sublease income are reported separately from our ASC 606 revenues, as is the related cost of the property lease. This break-out first began when the agreement went into effect May 1, 2026.

Previous wording

Cost of Revenue and Gross Margins

Current wording

During the second quarter of 2026, we commenced a new multi-year warehousing and logistics arrangement with our largest customer utilizing our Round Rock, Texas facility. The arrangement expands our service offering beyond traditional integration activities and includes dedicated warehouse capacity, inventory handling, logistics management, and transportation support services. The contract contributed to increased systems integration revenue and operating income during the current quarter and is expected to provide a recurring stream of revenue and cash flows through March 31, 2029. We believe the arrangement further strengthens our strategic relationship with our largest customer and enhances visibility into future operating results.

Previous wording

In prior years, our depreciation related to equipment and other fixed assets used in revenue-generating activities was minimal. Following the significant capital investments recently made in our new Georgetown, Texas integration facility, we began in 2025 reporting as a component of cost of revenues the depreciation related to revenue-generating activities. That depreciation classified as cost of revenue amounted to $0.9 million in the three-month period ended March 31, 2026, with zero reported in the prior year quarter.

Current wording

In prior years, our depreciation related to equipment and other fixed assets used in revenue-generating activities was minimal. Following the significant capital investments made in our new Georgetown, Texas integration facility, we began in 2025 reporting as a component of cost of revenues the depreciation related to revenue-generating activities. That depreciation classified as cost of revenue amounted to $1.0 million in the three-month period ended June 30, 2026, with $0.6 million reported in the prior-year quarter.

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, equity-based compensation, professional fees, facility costs, insurance and other corporate costs. As a percentage of gross profit, SG&A expenses increased from 53% in the prior year quarter to 63% in the current quarter. In dollar terms, our SG&A expenses increased by $0.6 million (13%) due to higher non-cash equity based compensation, headcount and related compensation costs to support the growing scale of the organization.

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. As a percentage of gross profit, SG&A expenses increased from 66% in the prior-year quarter to 69% in the current quarter. In dollar terms, our SG&A expenses increased by $0.8 million (17%) due to higher non-cash equity-based compensation, headcount and related compensation costs to support the growing scale of the organization, including the creation of two new executive positions that we expect to help us expand our offerings, revenues and earnings in future periods.

Previous wording

Bank factoring fees decreased from $1.5 million in the prior year quarter to $0.7 million in the current quarter. This is due to the overall decline in the gross value of deals as the basis on which we are charged factoring fees is the gross billings factored, which includes the amount of procurement revenues “netted” out for GAAP-basis procurement revenues, as presented in the table in theNon-GAAP Revenue, Gross Profit and Gross Margins section above. Also contributing to the decrease in bank factoring fees is a slight decrease in prevailing short-term interest rates, which have a direct impact on the fees we pay.

Current wording

Bank factoring fees decreased from $0.9 million in the prior-year quarter to $0.5 million in the current quarter, primarily due to the smaller amount of receivables factored in the period. Also contributing to the decrease in bank factoring fees is a slight decrease in prevailing short-term interest rates, which have a direct impact on the fees we pay.

Previous wording

Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.7 million compared to $0.4 million earned in the prior year quarter. The cash balance increased primarily due to our raising $55.3 million as a result of our stock offering completed in August 2025, combined with continued net cash flows from operations.

Current wording

Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.6 million compared to $0.2 million earned in the prior-year quarter. The cash balance increased primarily due to our raising $55.3 million in a stock offering completed in August 2025.

Previous wording

Due to a history of consolidated net operating losses, we had historically recorded a full valuation allowance against our deferred tax asset (“DTA”). The minimal income tax expense recorded in periods prior to the fourth quarter of 2025 represented primarily Texas state franchise tax, with any federal taxes offset by a partial utilization of the DTA and related release of the offsetting valuation allowance. In light of our improved financial performance and expectation of continued generation of taxable income in future periods, we reversed in the quarter ended December 31, 2025 the majority of the valuation allowance we had previously recorded against our DTA.

Current wording

Due to a history of consolidated net operating losses, we had historically recorded a full valuation allowance against our deferred tax asset (“DTA”). The minimal income tax expense recorded in periods prior to the fourth quarter of 2025 represented primarily Texas state franchise tax, with any federal taxes offset by a partial utilization of the DTA and related release of the offsetting valuation allowance. In light of our improved financial performance and expectation of continued generation of taxable income in future periods, we reversed, in the quarter ended December 31, 2025, most of the valuation allowance we had previously recorded against our DTA.

Previous wording

The income tax expense in the current quarter was $0.4 million, or 14.7% of pre-tax income, compared to $49,000, or 1.6% of pre-tax income in the prior year quarter. The current quarter effective tax rate is comprised of federal and state income taxes of 28.2% of pre-tax income, net of a large discrete tax benefit tied to excess tax benefits on employee stock compensation in the first quarter of 2026. We expect the effective tax rate in the second through fourth quarters of 2026 to be approximately 26.0%, yielding a full-year effective tax rate of approximately 22.7%. This could be affected by large discrete items in future periods.

Current wording

The income tax expense in the current quarter was $0.4 million, or 22.4% of pre-tax income, compared to $69,000, or 4.4% of pre-tax income in the prior-year quarter. The current quarter effective tax rate is comprised of federal and state income taxes of 27.5% of pre-tax income, net of excess tax benefits on employee stock compensation in the current period. We expect the effective tax rate in the third through fourth quarters of 2026 to be approximately 27.5%, yielding a full-year effective tax rate of approximately 23.0%. This could be affected by large discrete items in future periods.

Previous wording

After the $0.4 million charge for income taxes, our net income was $2.3 million, or $0.08 per diluted share in the current quarter, compared to net income of $3.0 million, or $0.12 per diluted share in the prior year quarter. This reflects the net effect of the items discussed above, as well as a greater number of shares outstanding following our August 2025 sale of stock.

Current wording

After the $0.4 million charge for income taxes, our net income was $1.4 million, or $0.05 per diluted share in the current quarter, compared to net income of $1.5 million, or $0.06 per diluted share in the prior-year quarter. This reflects the net effect of the items discussed above, as well as a greater number of shares outstanding following our August 2025 sale of stock.

Previous wording

Total revenues in the current quarter decreased 44% to $55.3 million. Procurement revenues decreased by $50.2 million (56%) in comparison to an unusually large volume of procurement activity in the prior year quarter and facilities management revenues decreased by $0.1 million (1%). These decreases were somewhat offset by an increase in systems integration revenues of $6.6 million (88%). Deferred revenues decreased $11.5 million compared to the balance at December 31, 2025, for contracts and projects that were completed in the period ended March 31, 2026, including one unusually large order that was in process at December 31, 2025.

Current wording

Total revenues in the current year-to-date period decreased 37% to $90.2 million, comprised of increased revenues in our two higher margin lines of business, offset by a decrease in our lower margin procurement business. Procurement revenues, which can vary widely from period to period, decreased by $65.0 million (53%) in comparison to an unusually large volume of procurement activity in the prior-year year-to-date period. These decreases were somewhat offset by an increase in revenues from our two higher margin lines of business – systems integration and facilities management. Systems integration revenues increased $11.0 million (65%) from $17.0 million in the prior year-to-date period to $28.0 million in the current period. Facilities management revenues increased $1.2 million (44%), growing from $2.8 million in the prior year-to-date period to $4.0 million in the current year-to-date period. Deferred revenues decreased $10.9 million compared to the balance at December 31, 2025, for contracts and projects that were completed in the year-to-date period ended June 30, 2026, including one unusually large order that was in process at December 31, 2025.

Previous wording

The $6.6 million (88%) 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 amended our long-term agreement with our main customer in December 2025. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for our facility and debt service payments tied to our financing of the build-out of Georgetown, Texas facility which was completed in 2025. 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.

Current wording

The $11.0 million (65%) 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 amended our long-term agreement with our main customer in December 2025. 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 our financing of the build-out of our Georgetown, Texas facility which was completed in 2025. 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 sufficient revenue 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 prior year quarter included an unusually high level of sales to our largest customer for both governmental and private enterprise end users. 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 do not rely on a predictable flow of business, but we promote the importance of a procurement services solution alongside our customer using our sales personnel.

Current wording

The prior year included an unusually high level of procurement sales to our largest customer for both governmental and private enterprise end users. 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 do not rely on a predictable flow of business, but we promote the importance of a procurement services solution alongside our customer using our sales personnel. 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.

Previous wording

The gross value of all procurement transactions decreased 53% from the prior year quarter, from $106.0 million to $49.4 million in the current quarter. Gross profit recognized on all procurement transactions decreased 62% from $7.0 million to $2.7 million before interest charges. The prior year quarter included an elevated level of sales to the federal government, as well as one individually large transaction to an enterprise client, with a larger than normal margin in the prior year quarter.

Current wording

The gross value of all procurement transactions decreased 52% from the prior-year year-to-date period, from $171.7 million to $82.9 million in the current year-to-date period. Gross profit recognized on all procurement transactions decreased 51% from $10.0 million to $4.7 million before interest charges. The prior year included an elevated level of sales to the federal government, as well as one individually large transaction to an enterprise client, with a larger than normal margin in the prior-year period.

Previous wording

Although the margins are thin, efforts required to support the business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-sales of higher yielding integration services, so we continue to view this business as a growth vehicle. 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 in our other lines of business, efforts required to support the business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-sales of higher yielding integration services, so we continue to view this business as a growth vehicle. 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, depreciation of our manufacturing equipment, shipping costs, and 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 significantly improved, increasing from 9.3% in the prior year quarter to 15.9% in the current quarter. Gross margins for the current quarter were 6.7% for the procurement business, 37.5% for the systems integration business, and 64.7% for the facilities management business. In the prior year quarter, gross margins were 7.8% for the procurement business, 22.1% for the systems integration business and 40.9% 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, depreciation of our manufacturing equipment, shipping costs, and 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 significantly improved, increasing from 11.5% in the prior year-to-date period to 18.6% in the current year-to-date period, with margins improving in each reportable segment. Gross margins for the current period were 8.1% for the procurement business, 34.4% for the systems integration business, and 59.5% for the facilities management business. In the prior year-to-date period, gross margins were 7.8% for the procurement business, 30.7% for the systems integration business and 58.7% for the facilities management business.

Previous wording

We recognized an operating income of $2.3 million in the current quarter compared to operating income of $2.6 million in the prior year quarter. The majority of this decline is attributable to increased SG&A expenses as described above as the overall decline in total revenues was offset by our improved operational efficiency and gross margins. We expect revenues will continue to ramp at a faster pace than SG&A costs, which will lead to overall expected increases in operating income for the remainder of the year.

Current wording

We recognized an operating income of $3.9 million in the current year-to-date period compared to operating income of $4.0 million in the prior year-to-date period. The majority of this decline is attributable to increased SG&A expenses as described above as the overall decline in total revenues was offset by our improved operational efficiency and gross margins. We expect future revenues will ramp at a faster pace than SG&A costs, which will lead to overall expected increases in operating income for the remainder of the year.

Previous wording

Our primary sources of liquidity on March 31, 2026 were our cash and cash equivalents on hand and projected cash flows from operating activities. The $17.7 million net decrease in cash and cash equivalents was primarily attributable to a net use of $14.9 million in operating activities, reflecting largely the $2.5 million net income, net of $20.5 million cash used to reduce accounts payable and accrued expenses. Financing activities used $1.0 million for scheduled principal payments on our debt and $1.4 million to repurchase stock upon employees’ vesting in restricted stock. Investing activities were comprised of a $0.5 million use of cash for capital expenditures. In the prior year quarter, we invested $14.9 million in the continued buildout of our headquarters and integration facility in Georgetown, Texas. As of March 31, 2026, the Company was in compliance with all applicable covenants under its debt agreements. To secure the additional electrical capacity required to support increased demand, the utility provider required us to provide a $1.8 million bank letter of credit, which was issued during the current quarter and collateralized by a corresponding amount of restricted cash. In December 2025, we amended the long-term AI rack integration agreement with our OEM customer. 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, including increased power consumption, and debt service payments tied to the build-out of the factory for which we are responsible.

Current wording

Our primary sources of liquidity on June 30, 2026 were our cash and cash equivalents on hand and projected cash flows from operating activities. The $16.0 million year-to-date net decrease in cash and cash equivalents was primarily attributable to a net use of $7.3 million in operating activities, reflecting largely the $3.7 million net income, net of $11.0 million of cash related to paydowns of our accounts payable, increased inventory purchases, and the reduction of our deferred revenues period-over-period. Financing activities used $4.1 million, with just under half of that amount representing scheduled principal payments on our debt and just over half of that to repurchase stock upon employees’ vesting in restricted stock. Investing activities used $4.6 million of cash for capital expenditures, part of the roughly $17 million we expect to spend this year to enable us to integrate the next generation of AI racks. In the prior year-to-date period, we invested $25.8 million in the continued buildout of our headquarters and integration facility in Georgetown, Texas. As of June 30, 2026, the Company was in compliance with all applicable covenants under its debt agreements. To secure the additional electrical capacity required to support increased demand, the utility provider required us to provide a $1.8 million bank letter of credit, which was issued during the current year-to-date period and collateralized by a corresponding amount of restricted cash. In December 2025, we amended the long-term AI rack integration agreement with our OEM customer. 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, including increased power consumption, and debt service payments tied to the build-out of the factory for which we are responsible.

Previous wording

As of March 31, 2026, we had cash and cash equivalents of $67.8 million, of which $1.8 million was held in a money market account as collateral against our outstanding letter of credit and therefore was not immediately accessible, as describe above.

Current wording

As of June 30, 2026, we had cash and cash equivalents of $69.5 million, of which $1.8 million was held in a money market account as collateral against our outstanding letter of credit and therefore was not immediately accessible, as described above.

Previous wording

Cash used in operating activities was $14.9 million in the current quarter, compared to $20.6 million of cash provided by operating activities in the prior year quarter. With net income only $0.7 million different between the two periods, the primary difference was due to changes in operating assets and liabilities in each period. Operating cash flow in the current quarter was primarily due to the $2.3 million of net income, more than offset by a $20.1 million net use of cash for the change in operating assets and liabilities, largely to pay down accounts payable and accrued expenses as we paid costs related to projects that were in process at the beginning of the current quarter. In the prior year quarter, the $20.6 million cash provided by operating activities was comprised primarily of $3.0 million of net income combined with a $16.0 million net inflow of cash from the change in operating assets and liabilities, primarily an increase in accounts payable and accrued expenses during that period stemming from a large procurement project.

Current wording

Cash used in operating activities was $7.3 million in the current quarter, compared to $37.0 million of cash provided by operating activities in the prior-year period. With net income only $0.8 million different between the two periods, the primary difference was due to changes in operating assets and liabilities in each period. Operating cash flow in the current quarter was primarily due to the $3.7 million of net income, more than offset by a $16.1 million net use of cash for the change in operating assets and liabilities, largely to pay down accounts payable and accrued expenses as we paid costs related to projects that were in process at the beginning of the current year. In the prior-year period, the $37.0 million cash provided by operating activities was comprised primarily of $4.5 million of net income combined with a $28.5 million net inflow of cash from the change in operating assets and liabilities, primarily an increase in accounts payable and accrued expenses during that period stemming from a large procurement project.

Previous wording

We invested $14.9 million of cash in the three months ended March 31, 2025 primarily in the continued buildout of our leased integration facility and headquarters. These costs were largely for enhancements to our electrical and cooling systems to support our growth in AI-enabled rack integration. This compares to only $0.5 million invested in capital assets in the current quarter as the buildout of our new facility and associated capital expenditures were completed in the prior year.

Current wording

We invested $4.6 million of cash in the six months ended June 30, 2026 primarily in the continued buildout of our leased integration facility and headquarters. These costs were largely for enhancements to our electrical and cooling systems to support our growth in AI-enabled rack integration, and is part of approximately $17 million we plan to spend during 2026 to ready the facility to integrate the next generation of AI computer chips. We anticipate this investment will drive incremental revenues for several future years. This compares to $25.8 million invested in capital assets in the prior year-to-date period as the buildout of our new facility and associated capital expenditures were completed in the prior year.

Previous wording

Our primary liquidity and capital requirements are to fund working capital from current operations, to fund the repurchase of shares from employees upon option exercises or vesting of restricted stock to allow them to cover their tax liabilities and to fund the repayments of our outstanding debt. Our largest customer has also recently requested that we further enhance our integration facility, which we expect will require us to invest approximately $17 million in capital expenditures. We expect to recapture these costs, plus the cost of capital and a profit margin through increased fees for integration services over the next several years, tied to our multi-year AI rack integration agreement. 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 or further expand our facility. While we have no immediate plans to do so and there are no assurances that we could issue equity or other securities on terms that are satisfactory to us, we could raise an additional $94.3 million under our currently effective shelf registration statement.

Current wording

Our primary liquidity and capital requirements are to fund working capital from current operations, to fund the repurchase of shares from employees upon option exercises or vesting of restricted stock to allow them to cover their tax liabilities and to fund the repayments of our outstanding debt. Our largest customer also recently requested that we further enhance our integration facility, which we expect will require us to invest a total of approximately $17 million in capital expenditures, $4.5 million of which has already been invested in the current year-to-date period. We expect to recapture these costs, plus a profit margin through increased fees for integration services over the next several years, tied to our multi-year AI rack integration agreement. 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 or further expand our facility. While we have no immediate plans to do so and there are no assurances that we could issue equity or other securities on terms that are satisfactory to us, we could raise an additional $94.3 million under our currently effective shelf registration statement.

Previous wording

During the three months ended March 31, 2026, the Company entered into a letter of credit arrangement with a financial institution in support of utility service requirements associated with its operations. The letter of credit was required by the Company’s utility provider to ensure adequate electrical capacity and reliability.

Current wording

In the first quarter of 2026, the Company entered into a letter of credit arrangement with a financial institution in support of utility service requirements associated with its operations. The letter of credit was required by the Company’s utility provider to ensure adequate electrical capacity and reliability.

Previous wording

Other than the letter of credit described above, the Company has not entered into any material off‑balance sheet arrangements during the three months ended March 31, 2026.

Current wording

Other than the letter of credit described above, the Company has not entered into any material off‑balance sheet arrangements during the six months ended June 30, 2026.