TSS, Inc.

Previous wording

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Current wording

I****tem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

Management’s Discussion and Analysis of Financial Condition and Result of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of TSS, Inc. and its subsidiaries (collectively “we”, “us”, “our”, “TSS” or the “Company”). The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2025 included in our 2025 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words“believe,”* “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the*“Risk Factors”* in Part 1, Item 1A of our 2025 Annual Report on Form 10-K for a discussion of items that may affect our future results.*

Current wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of TSS, Inc. and its subsidiaries (collectively “we”, “us”, “our”, “TSS” or the “Company”). The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2025 included in our 2025 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words“believe,”* “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the*“Risk Factors”* in Part I, Item 1A of our 2025 Annual Report on Form 10-K for a discussion of items that may affect our future results.*

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 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.

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 in addition 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

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, inferencing and agentic 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 face immense pressure to rapidly integrate and deploy the latest generative, inferencing and agentic 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

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.

Current wording

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

The $4.4 million (46%) increase in systems integration revenues was due primarily to the continued growth in integration of AI-enabled computer racks 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 of our facility and debt service payments tied to our financing of the build-out of the 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 $6.9 million (75%) increase in systems integration revenues was due primarily to the continued growth in integration of AI-enabled computer racks 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 of our facility and debt service payments tied to our financing of the build-out of the 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.

Previous 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.

Current wording

Effective May 1, 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 as well as $0.4 million of operating lease 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. We expect incremental revenue beginning in the fourth quarter of 2026 as we begin providing similar warehousing and logistics services from our new Berry Creek Warehouse.

Previous wording

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. In the current quarter, procurement revenues decreased from $33.0 million in the prior-year quarter to $18.2 million. 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 higher margin facilities management or systems integration lines of business.

Current wording

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. In the current quarter, procurement revenues increased from $31.1 million in the prior-year quarter to $32.4 million. 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 higher margin facilities management or systems integration lines of business.

Previous wording

The gross value of all procurement transactions decreased 49% from the prior-year quarter, from $65.7 million to $33.5 million in the current quarter. Gross profit recognized on all procurement transactions decreased 21% from $2.5 million to $2.0 million before interest charges. The decrease in revenues was favorably muted by a margin expansion from 7.7% to 11.0% on a GAAP basis and from 3.9% to 6.0% on a gross basis.

Current wording

Although the recognized revenue from procurement transactions increased 4%, the gross value of all procurement transactions decreased 6% from the prior-year quarter, from $48.1 million to $45.0 million in the current quarter. Gross profit recognized on all procurement transactions decreased 12% from $2.6 million to $2.3 million before interest charges, driven by the decrease in the gross value of transactions, combined with a slight decrease in the gross margin calculated on the same gross basis.

Previous wording

Operating lease income was approximately $289,000 for the three months ended June 30, 2026 and relates to a warehousing and logistics arrangement that commenced May 1, 2026 at our former Round Rock, Texas integration facility. Following applicable accounting rules, we determined that the arrangement contains an embedded lease under ASC 842. As a result, we allocate a portion of the contractual consideration to lease income, with the remainder recognized as service revenue under ASC 606. Because the arrangement did not exist during the comparable prior-year period, no operating lease income was recognized in 2025. We expect operating lease income to continue over the remaining contractual term, which extends through March 31, 2029. Partially offsetting the lease income is a $235,000 cost of lease operations, yielding a $54,000 contribution to gross profit from embedded lease portion of this arrangement. The non-lease revenues and expenses related to this arrangement are included in our systems integration segment results.

Current wording

Operating lease income was approximately $433,000 for the three months ended September 30, 2026 and relates to a warehousing and logistics arrangement that commenced May 1, 2026 at our former Round Rock, Texas integration facility. Following applicable accounting rules, we determined that the arrangement contains an embedded lease under ASC 842. As a result, we allocate a portion of the contractual consideration to lease income, with the remainder recognized as service revenue under ASC 606. Because the arrangement did not exist during the comparable prior-year period, no operating lease income was recognized in 2025. We expect operating lease income to continue over the remaining contractual term, which extends through March 31, 2029. Partially offsetting the lease income is a $353,000 cost of lease operations, yielding an $80,000 contribution to gross profit from the embedded lease portion of this arrangement. The non-lease revenues and expenses related to this arrangement are included in our systems integration segment results.

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. Cost of lease operations consists primarily of rent expense and other direct occupancy costs associated with our Round Rock, Texas warehouse facility that are attributable to operating lease income recognized under ASC 842.

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 and other fixed assets directly related to our revenue-producing operations, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. Cost of lease operations consists primarily of rent expense and other direct occupancy costs associated with our Round Rock, Texas warehouse facility that are attributable to operating lease income recognized under ASC 842.

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 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.

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 $1.1 million in the three-month period ended September 30, 2026, with $1.0 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 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.

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 decreased from 113% in the prior-year quarter to 71% in the current quarter. In dollar terms, our SG&A expenses increased by $0.9 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

Depreciation and amortization not allocated to cost of revenues increased from $0.2 million in the prior-year quarter to $0.3 million in the current quarter due to the general growth in the business.

Current wording

Depreciation and amortization not allocated to cost of revenues increased from $0.3 million in the prior-year quarter to $0.4 million in the current quarter due to the general growth in the business.

Previous 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.

Current wording

Bank factoring fees decreased from $0.8 million in the prior-year quarter to $0.7 million in the current quarter. Factoring fees fluctuate with both the amount of receivables factored in a given period and prevailing short-term interest rates.

Previous wording

Reflecting the margin expansion, our operating income increased 16%, from $1.4 million in the prior-year quarter to $1.6 million in the current quarter. We expect future revenues will ramp at a faster pace than SG&A and other costs, which will lead to overall expected increases in operating income for the remainder of the year.

Current wording

Our operating income improved to $1.2 million in the current quarter, compared to an operating loss of $1.8 million in the prior-year quarter. We expect future revenues will continue to ramp at a faster pace than SG&A and other costs, which will lead to overall expected increases in operating income for the remainder of the year.

Previous wording

In the current quarter, we recorded interest expense of $0.3 million compared to no interest expense in the prior-year quarter. This increase was due to our long-term debt converting into an interest-bearing note in the third quarter of the prior year. As such, all interest charges in the prior-year quarter were capitalized as part of the build-out costs of our new Georgetown facility.

Current wording

In the current quarter, we recorded interest expense of $0.3 million compared to $0.1 million of interest expense in the prior-year quarter. This increase was due to our long-term debt converting into an interest-bearing note in the third quarter of the prior year, and some continued capitalization of interest in the prior year quarter as the initial build-out of our integration facility was being completed.

Previous 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.

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 $0.4 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

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.

Current wording

The income tax expense in the current quarter was $0.3 million, or 22.7% of pre-tax income, compared to $50,000, or 3.5% of pre-tax loss in the prior-year quarter. The current quarter effective tax rate is comprised of federal and state income taxes of 27.3% 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 fourth quarters of 2026 to be approximately 25.5%, yielding a full-year effective tax rate of approximately 22.0%. 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 $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.

Current wording

Our net income was $1.1 million, or $0.04 per diluted share in the current quarter, compared to a net loss 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

Unless otherwise noted, all comparisons in this section are between the six-month period ended June 30, 2026 (the “current year-to-date period” or “current period”) and the six-month period ended June 30, 2025 (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, 2026 (the “current year-to-date period” or “current period”) and the nine-month period ended September 30, 2025 (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 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.

Current wording

Total revenues in the current year-to-date period decreased 24% to $140.5 million, comprised of increased revenues in our two higher margin lines of business and the introduction of operating lease income, offset by a decrease in our lower margin procurement business. Procurement revenues, which can vary widely from period to period, decreased by $63.7 million (41%) 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 $17.9 million (68%) from $26.2 million in the prior year-to-date period to $44.1 million in the current period. Facilities management revenues increased $0.8 million (17%), growing from $4.4 million in the prior year-to-date period to $5.1 million in the current year-to-date period. Operating lease income was $0.7 million compared to zero in the prior year period.

Previous 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.

Current wording

The $17.9 million (68%) 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

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 year-to-date period 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.

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 as well as $0.7 million of operating lease income during the current year-to-date period 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

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.

Current wording

The gross value of all procurement transactions decreased 42% from the prior-year year-to-date period, from $219.8 million to $127.9 million in the current year-to-date period. Gross profit recognized on all procurement transactions decreased 43% from $12.1 million to $7.0 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 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. We currently expect procurement revenues to return to the more typical range of $30 million to $40 million in the quarter ending September 30, 2026.

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

Operating lease income was approximately $289,000 for the six months ended June 30, 2026 and relates to a warehousing and logistics arrangement that commenced May 1, 2026 at our former Round Rock, Texas integration facility. Following applicable accounting rules, we determined that the arrangement contains an embedded lease under ASC 842. As a result, we allocate a portion of the contractual consideration to lease income, with the remainder recognized as service revenue under ASC 606. Because the arrangement did not exist during the comparable prior-year period, no operating lease income was recognized in 2025. We expect operating lease income to continue over the remaining contractual term, which extends through March 31, 2029. Partially offsetting the lease income is a $235,000 cost of lease operations, yielding a $54,000 contribution to gross profit from embedded lease portion of this arrangement during the current year-to-date period. The non-lease revenues and expenses related to this arrangement are included in our systems integration segment results.

Current wording

Operating lease income was approximately $722,000 for the nine months ended September 30, 2026, and relates to a warehousing and logistics arrangement that commenced May 1, 2026 at our former Round Rock, Texas integration facility. Following applicable accounting rules, we determined that the arrangement contains an embedded lease under ASC 842. As a result, we allocate a portion of the contractual consideration to operating lease income, with the remainder recognized as service revenue under ASC 606. Because the arrangement did not exist during the comparable prior-year period, no operating lease income was recognized in 2025. We expect operating lease income to continue over the remaining contractual term, which extends through March 31, 2029. Partially offsetting the lease income is a $588,000 cost of lease operations, yielding a $134,000 contribution to gross profit from the embedded lease portion of this arrangement during the current year-to-date period. The non-lease revenues and expenses related to this arrangement are included in our systems integration segment results.

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 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.

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 and other fixed assets directly related to our revenue-producing operations, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. Our consolidated gross margin significantly improved from 11.4% in the prior year-to-date period to 18.1% in the current year-to-date period. The following table presents our gross margins by reportable segment:

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 made in our 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 $1.9 million in the six-month period ended June 30, 2026, with $618 thousand reported in the prior year-to-date period.

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 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 $3.0 million in the nine-month period ended September 30, 2026, with $1.6 million reported in the prior year-to-date period.

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 59% in the prior year-to-date period to 66% in the current period. In dollar terms, our SG&A expenses increased by $1.5 million (15%) 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.

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 improved from 71% in the prior year-to-date period to 68% in the current period. In dollar terms, our SG&A expenses increased by $2.3 million (16%) 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

Depreciation and amortization not allocated to cost of revenues increased from $0.4 million in the prior year-to-date period to $0.6 million in the current year-to-date period due to the general growth in the business.

Current wording

Depreciation and amortization not allocated to cost of revenues increased from $0.8 million in the prior year-to-date period to $1.0 million in the current year-to-date period due to the general growth in the business.

Previous wording

Bank factoring fees decreased from $2.3 million in the prior year-to-date period to $1.2 million in the current period, driven by the overall decline in the gross value of receivables factored combined with 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 $3.2 million in the prior year-to-date period to $1.9 million in the current period, driven by the overall decline in the gross value of receivables factored combined with the impact of changes in prevailing short-term interest rates, which have a direct impact on the fees we pay.

Previous 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.

Current wording

We recognized an operating income of $5.0 million in the current year-to-date period compared to operating income of $2.3 million in the prior year-to-date period. The majority of this improvement is attributable to the significant growth in our systems integration revenues and resulting gross profit and efficiently scaling our SG&A expenses in relation to the higher gross profit and general scale of the company. 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

In the current year-to-date period, we recorded interest expense of $0.7 million compared to no interest expense in the prior year-to-date period. This increase was due to our long-term debt converting into an interest-bearing note in the third quarter of the prior year. As such, all interest charges in the prior year period were capitalized as part of the build-out costs of our new Georgetown facility.

Current wording

In the current year-to-date period, we recorded interest expense of $1.0 million compared to $0.1 million expense in the prior year-to-date period. This increase was due to our long-term debt converting into an interest-bearing note in the third quarter of the prior year. As such, most interest charges in the prior year period were capitalized as part of the build-out costs of our new Georgetown facility.

Previous wording

Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $1.3 million compared to $0.6 million earned in the prior year period. The cash balance increased primarily due to our raising $55.3 million in a stock offering completed in August 2025.

Current wording

Due primarily to the higher average balance of cash on hand in the current period, combined with the recently increasing yield on short-term deposits, interest income increased to $1.9 million compared to $1.0 million earned in the prior year period. The cash balance increased primarily due to our raising $55.3 million in a stock offering completed in August 2025, net of capital investments made since then.

Previous wording

The income tax expense in the current year-to-date period was $0.8 million, or 17.8% of pre-tax income, compared to $0.1 million, or 2.6% of pre-tax income in the prior year-to-date period. The current period effective tax rate is comprised of federal and state income taxes of 27.5% of pre-tax income, net of large discrete tax benefits tied to excess tax benefits on employee stock compensation in the first six months of 2026. 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.

Current wording

The income tax expense in the current year-to-date period was $1.1 million, or 19.0% of pre-tax income, compared to $0.2 million, or 5.4% of pre-tax income in the prior year-to-date period. The current period effective tax rate is comprised of federal and state income taxes of 27.3% of pre-tax income, net of large discrete tax benefits tied to excess tax benefits on employee stock compensation in the first nine months of 2026. We expect the effective tax rate in the fourth quarter of 2026 to be approximately 25.5%, yielding a full-year effective tax rate of approximately 22.0%. This could be affected by large discrete items in future periods.

Previous wording

After the $0.8 million charge for income taxes, our net income was $3.7 million, or $0.13 per diluted share in the current year-to-date period, compared to net income of $4.5 million, or $0.17 per diluted share in the prior year-to-date period. 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

Our net income was $4.9 million, or $0.16 per diluted share in the current year-to-date period, compared to net income of $3.0 million, or $0.11 per diluted share in the prior year-to-date period. 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

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.

Current wording

Our primary sources of liquidity on September 30, 2026 were our cash and cash equivalents on hand and projected cash flows from operating activities. The $29.7 million year-to-date net decrease in cash and cash equivalents was primarily attributable to a net use of $10.3 million in operating activities, reflecting largely the $4.9 million net income, net of $15.1 million of cash primarily related to paydowns of our accounts payable, increased inventory purchases, and the reduction of our deferred revenues period-over-period. Financing activities used $5.2 million, with just over half of that amount representing scheduled principal payments on our debt and just under half of that to repurchase stock upon employees’ vesting in restricted stock. Investing activities used $14.3 million of cash for capital expenditures. Inclusive of both investments put into use and a smaller amount remaining in Construction in Process as the end of the current quarter, that includes roughly $15.5 million incurred to date of the $17 million we expect to spend this year to enable us to integrate the next generation of AI racks, with the remainder of that spend expected in the fourth quarter of 2026. In the prior year-to-date period, we invested $32.2 million in the continued buildout of our headquarters and integration facility in Georgetown, Texas. As of September 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 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.

Current wording

As of September 30, 2026, we had cash, cash equivalents and restricted cash of $55.8 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 described above.

Previous 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.

Current wording

Cash used in operating activities was $10.3 million in the current year-to-date period, compared to $18.5 million of cash provided by operating activities in the prior year period. With net income $1.9 million higher in the current period, the primary difference was due to changes in operating assets and liabilities in each period. Operating cash flow in the current year-to-date period was primarily due to the $4.9 million of net income, more than offset by a $15.1 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 $18.5 million cash provided by operating activities was comprised primarily of $3.0 million of net income combined with a $15.6 million net inflow of cash from the change in operating assets and liabilities, primarily a decrease in inventories and an increase in deferred revenues.