TSSI 10-K & 10-Q changes, risk factors and insider trading
TSS, Inc. · Nasdaq · Services-Management Consulting Services · CIK 1320760 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
New heading “Our revenues are highly concentrated with a single OEM customer, and our business, financial condition and results of operations would be materially and adversely affected if we are unable to maintain or expand that relationship or successfully diversify our customer base.”
New heading “A prolonged U.S. federal government shutdown could materially and adversely affect our business and operations”
New heading “The ongoing refinement and integration of our ERP system could disrupt operations and adversely affect our internal control over financial reporting.”
New heading “Our procurement business requires significant working capital and depends on vendor trade credit and a single factoring arrangement; any disruption, modification or timing mismatch could materially affect our liquidity and operating results.”
New heading “A cybersecurity incident, including one affecting our third-party service providers, could materially disrupt our operations, expose us to liability and subject us to mandatory public disclosure under SEC rules.”
New heading “We have identified a material weakness in our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information.”
Removed heading “We derive a significant portion of our revenues from one customer.”
Removed heading “We have a history of operating losses, and we may experience net losses in the future.”
Removed heading “We are attempting to diversify our customer base but there is no guarantee that we will be successful in doing so.”
Removed heading “We are partially through the implementation of a new enterprise resource IT system and have yet to fully deploy this new system across all of our business units. Any challenges, delays, difficulties, or errors during the implementation of this new system may negatively impact our business operation and harm our operating results.”
Removed heading “The level of our procurement business may fluctuate significantly on a quarterly basis, requiring additional working capital to grow.”
Removed heading “Security breaches and attacks on our computer systems could lead to significant costs and disruptions that could harm our business, financial results and reputation.”
Removed heading “Because we do not currently intend to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.”
Removed heading “Our insiders beneficially own a significant portion of our outstanding common stock. Future sales of common stock by these insiders may adversely affect the market price of our common stock.”
Largest changes
“We have identified a material weakness in our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information.”see in full comparison
“Our procurement business requires significant working capital and depends on vendor trade credit and a single factoring arrangement; any disruption, modification or timing mismatch could materially affect our liquidity and operating results.”see in full comparison
“A cybersecurity incident, including one affecting our third-party service providers, could materially disrupt our operations, expose us to liability and subject us to mandatory public disclosure under SEC rules.”see in full comparison
“Security breaches and attacks on our computer systems could lead to significant costs and disruptions that could harm our business, financial results and reputation.”see in full comparison
“The ongoing refinement and integration of our ERP system could disrupt operations and adversely affect our internal control over financial reporting.”see in full comparison
“Furthermore, we cannot provide any assurances that we have identified all material weaknesses. In the future, it is possible that additional material weaknesses or significant deficiencies may be identified that we may be unable to remediate timely. If we fail to maintain effective systems, controls and procedures, including disclosure controls and procedures and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations and prevent fraud could be adversely impacted. …”see in full comparison
Full comparison: every changed paragraph (56)
Our revenues are highly concentrated with a single OEM customer, and our business, financial condition and results of operations would be materially and adversely affected if we are unable to maintain or expand that relationship or successfully diversify our customer base.
We derive a substantial majority of our revenues from a single OEM customer. Revenues from this customer comprised approximately 99%, 99% and 96% of our total revenues for the years ended December 31, 2025, 2024 and 2023, respectively. Although we provide services across multiple business units and divisions of this OEM and have entered into a long-term AI rack integration agreement that includes minimum monthly payments, our overall financial performance remains highly dependent on the continuation and scope of this relationship.
Any reduction, delay or termination of purchases by this customer, whether due to changes in its business strategy, demand for its products, supply chain constraints, regulatory developments, pricing pressure, internal reorganization, competitive dynamics, financial condition or otherwise, could result in a material decline in our revenues, profitability and cash flows. Because our cost structure includes fixed facility costs, labor and debt service obligations associated with our integration facility, a reduction in volume from this customer could have a disproportionate negative effect on our operating results.
In addition, while we are actively pursuing diversification of our customer base through expanded procurement services, AI rack integration for additional OEMs, value-added resellers, systems integrators and MDC providers, there can be no assurance that these efforts will be successful or that new customers will generate revenues at levels sufficient to offset any decline from our primary OEM customer. The timing, scale and profitability of diversification initiatives are uncertain and may require additional investment in personnel, facilities, working capital or infrastructure before generating meaningful returns.
Given the magnitude of our customer concentration, even a relatively modest change in purchasing patterns by our primary OEM customer could materially and adversely affect our business, financial condition and results of operations.
We derive a significant portion of our revenues from one customer.
We currently derive and believe that we will continue to derive in the near term a significant portion of our revenues from one OEM customer. We provide a range of different services and generate revenue from multiple business units and divisions of this OEM customer. To the extent that any significant business unit or division of this OEM customer uses less of our services or terminates its relationship with us, or this OEM reorganizes its business units and divisions in such a way that directly impacts the level of business with us, our revenues would decline significantly, which would have a material adverse effect on our financial condition and the results of our operations. Revenues from this OEM customer comprised 99% and 96% of our total revenues in the years ended December 31, 2024 and 2023, respectively.
A material breach of our multi-yearlong-term rack integration agreement, or our choice to terminate the agreement for any reason other than the other party’s material breach of the agreement, could significantly reduce certain minimum payments from our primary OEM partner.
We have incurred notable financial commitments related to a new lease on a larger integration facility and the debt to finance capital expenditures in that facility needed to fulfilfulfill our obligations under the multi-yearlong-term AI rack integration agreement with our largest OEM partner. Our multi-yearlong-term agreementagreement, and subsequent amendment, calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required, per the terms of the multi-year term of the agreement, 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, they would be relieved of any further obligation. Either of these events would represent a material adverse effect on our results of operations, financial condition and cash flows.
A significant driver of the growth in our recentlyrevenue improvedand financial resultsearnings is our AI rack integration services and the revenues and earnings driven by those services. Technology for AI computers continues to advance, and currently each new generation typically consumes more electrical power than preceding generations, which in turn requires even more electrical power and additional cooling equipment. We recentlymoved signed a lease onto a new building toin which we plan to move all of our operations including our rack integration business,2025, primarily to secure access to the electrical power needed to perform our AI rack integration services. While we believe we are relocatingrelocated to a location where we can source additional power if and when needed due to the city building an electrical power substation very near our leased property, we have no guarantee that such additional power will be available or be allocated to us beyond the 15 Megawatts to which the city has contractually committed itself to provide bycurrently. mid-2025, though theThe city has indicated they will be able to continue to increase the available power over time. If new generations of AI computer racks continue to consume more power than preceding generations, our failure to obtain access to additional power in a reasonable time frame, or the inability to secure additional chillers or other cooling capacity to cool the related racks would have a material, negative impact on our ability to meet our customers’ needs. Future increases in power requirements could also require us to make incremental capital investments in our facility to continue to scale with the power and cooling requirements.
The United States has recently begun to implement material tariffs on some of the countries with which it has a great deal of international trade and has threatened tariffs on a variety of other counties.countries. Many of the servers we integrate, other goods on which we provide configuration services and some products we procure for our customers have recently been made or assembled in countries subject to such tariffs. This introduces additional doubt as to whether our customers will be able to pass such costs onto their customers and as a result whether they can continue to sell such products at an acceptable profit. This, in turn, could materially and negatively affect our revenues, cash flows and financial position. Even if tariffs are ultimately lifted, temporary implementation of tariffs introduces doubt in the mind of buyers and causes disruptions in the supply chain that could introduce weeks or even months of delays in the ability to source parts and therefore similar delays in our ability to operate at full capacity, negatively impacting our earnings and financial position, and possibly even leading to cancelation of customer orders based on expected delays.
A prolonged U.S. federal government shutdown could materially and adversely affect our business and operations
As a significant portion of our procurement business is related to U.S. federal government purchases, a prolonged temporary shutdown of the U.S. federal government could materially impact our revenues and cash flows from our procurement segment. A prolonged shutdown, including the furlough of U.S. government employees, may disrupt our ability to complete existing procurement orders and obtain future business. In addition, periodic U.S. federal government shutdowns may adversely affect the broader U.S. economy, investor confidence, and capital markets. Such conditions could negatively impact the liquidity or trading volume of our securities, which in turn could have a material adverse effect on our business, results of operations, and stock price.
Supply chain challenges havecould negatively affect our integration business by slowing the supply of parts needed to perform integration services, requiring us to hold greater quantities of inventory for longer periods and/or delaying completion of services for our customers.
SinceSupply thechain COVID 19 pandemic began in 2020, due to its impactchallenges on global production and distribution wecould have experienced periodic impacts fromcause shortages of components needed to complete integration and procurement services, delaying our ability to recognize revenue for these projects and negatively impacting our profitability and cash flows. In addition to delaying our services, this hascould also resultedresult in us having to hold onto greater quantities of customer inventory for longer time periods while we wait for the missingdelayed components to be delivered. Due to our fixed storage capacity, holding customer-owned inventory for longer periods hascould negatively impactedimpact our ability to perform other services and addedadd cost and risk, including custodial risk, into our integration business. The supply chain disruptions havecould also directly impactedimpact vendors and other third parties from whom we procure goods and services for our procurement business, causing delays in completing procurement services for our customers. This has the potential to materially harm our operating results by delaying recognition of revenue. This can also harm our liquidity position if we are forced to pay vendors for products and services before we have the ability to invoice and receive payment from our customers, which could also prevent us from performing additional procurement services for our customers or cause other liquidity concerns. Although our multi-yearlong-term AI rack integration agreement signed in 2024 and subsequently amended in 2025 passes much of the risk for supply chain disruptions to our customer through the use of minimum quantity commitments as it relates to AI rack integration, we are still exposed to these issues in our procurement business, non-AI rack integration business and configuration services.
We believe that our future success will depend in large part on our continued ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional, and technical personnel. Our business involves the development of tailored solutions for customers, a process that relies heavily upon the expertise and services of employees. Accordingly, our employees are one of our most valuable resources. Competition for skilled personnel is intense in our industry. Recruiting and training these personnel requires substantial resources particularly when seeking qualified staff in remote locations where a number of our customers operate their data centers. Our failure to attract and retain qualified personnel could increase ourthe costscost of performingfulfilling our contractual obligations, reduce our ability to efficiently satisfy our customers’ needs, limit our ability to win new business and constrain our future growth.
At times, we experience higher levels of attrition, increasing compensation costs, and more intense competition for talent. We believe that our future success will be dependent upon retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur. As a company with a small company,workforce, we are particularly susceptible to negative impacts if critical and experienced personnel leave. As a result, we havecontinue investedto in a Chief People Officer position andinvest in Human Resources automation tools that help us manage through many of these challenges. Hiring and retaining qualified executives and other employees is therefore critical to our business. From 20222023 to 2024,2025, we had a number of planned changes to our executive leadership team, and we experienced increased wage pressure and challenges in hiring peopleother staff in the Austin, Texas market. We have had to pay higher wageswages, and elected to improve our health and welfare plans to attract new employees and retain our existing employees. If our total compensation programs, employment benefits, and overall workplace culture are not viewed as competitive, our ability to attract, retain and motivate employees could be compromised. To the extent we experience significant attrition or the loss of critical employees and are unable to replace employees in a timely manner, we could experience a loss of critical skills and reduced employee morale, potentially resulting in business disruptions or increased expenses to address any disruptions. To the extent that we are unable to promptly pass higher labor costs on to our customers, our business will be negatively impacted. Our inability to attract, retain and motivate employees or manage a succession of key roles may inhibit our ability to maintain or expand our business operations.
The ongoing refinement and integration of our ERP system could disrupt operations and adversely affect our internal control over financial reporting.
Our ERP platform is central to managing inventory, tracking AI rack integration workflows, processing procurement transactions and generating financial reports. We continue to enhance the system to support higher transaction volumes, new service offerings and expanded operational complexity. Modifications, upgrades, system integrations or changes in business processes may introduce errors, system downtime, or data inconsistencies.
If our ERP system fails to operate as intended, we could experience delays in fulfilling customer orders, inaccuracies in inventory balances, or delays in billing and collections. In addition, weaknesses in system configuration, user access management, change management controls or data interfaces could impair the effectiveness of our disclosure controls and internal control over financial reporting.
As our business grows and our financial reporting requirements increase, including potential auditor attestation of ICFR, deficiencies in our ERP control environment could result in increased audit scrutiny, remediation costs, reporting delays or identification of control deficiencies. Any material disruption or control failure associated with our ERP system could materially and adversely affect our business, financial condition and results of operations.
Our procurement business requires significant working capital and depends on vendor trade credit and a single factoring arrangement; any disruption, modification or timing mismatch could materially affect our liquidity and operating results.
Our procurement activities require us, at times, to purchase substantial quantities of hardware, software and related services from third-party vendors in advance of receiving payment for those goods. The volume and timing of procurement transactions may fluctuate significantly based on customer demand and project schedules, which can materially increase our working capital requirements during periods of elevated activity.
We finance these activities primarily through vendor trade credit and a receivables factoring arrangement. Our liquidity therefore depends on the continued availability and consistent operation of that factoring structure, as well as stable vendor payment terms. If vendor credit terms are shortened, credit limits are reduced, advance rates or related fees are modified, eligibility requirements change, or the factoring arrangement is restricted or terminated, our short-term cash requirements could increase materially.
In addition, if shipment timing, customer acceptance procedures or billing cycles are delayed, we may be required to satisfy vendor obligations prior to receiving corresponding funds, creating temporary liquidity pressure. If we are unable to maintain sufficient trade credit or continued access to our factoring arrangement on acceptable terms, we may need to deploy cash reserves, obtain alternative financing or limit procurement volumes, any of which could materially and adversely affect our revenues, liquidity and results of operations.
We have a history of operating losses, and we may experience net losses in the future.
Although we recorded improved operating income in 2022-2024 and net income in 2023 and 2024, we had a net loss in 2022, and we recorded operating and net losses in both 2021 and 2020. We have a history of recurring net annual losses in prior years and on December 31, 2024, we had an accumulated deficit of approximately $60.3 million. We believe that changes we have made to the business in recent years, including the addition of procurement services, changes to our operating cost structure, and the new multi-year AI rack building agreement have significantly improved our operating results and allowed us to achieve multiple profitable quarters in each of the last several years. Our efforts to align costs with sales and gross margin volume have reduced our level of overhead, but there can be no guarantee that we will be successful in sustaining or increasing profitability in 2025 or beyond. The uncertainty of a rapidly changing marketplace and ongoing global supply challenges have created a volatile and challenging business climate, which may continue to negatively impact our customers and their spending and investment decisions. We may not be able to generate the level of revenue necessary to achieve and maintain sustainable profitability and a failure to maintain and grow our revenue volumes would adversely affect our business, financial condition and operating results.
We are attempting to diversify our customer base but there is no guarantee that we will be successful in doing so.
Revenues from our largest customer comprised 99% and 96% of our total revenues in the years ended December 31, 2024 and 2023, respectively. We are continuing our efforts to add new revenue streams such as our strategic procurement services that we began offering in 2019, as well as targeting other vendors in the data center infrastructure market, including Value Added Resellers and systems integrators who have the need for IT integration services. We are also targeting other vendors in the modular data center market to leverage our expertise and capabilities in this marketplace. We are also trying to stay ahead of emerging trends in the IT market space such as direct-liquid-cooled product offerings, AI computing, immersion technology and edge-based solutions so that we can develop service offerings to leverage growth opportunities for these new markets. While we believe our efforts will allow us to broaden our customer base and reduce our customer concentration, there can be no guarantee that we will be successful at these endeavors, or of the time that it will take for these efforts to be successful.
We are partially through the implementation of a new enterprise resource IT system and have yet to fully deploy this new system across all of our business units. Any challenges, delays, difficulties, or errors during the implementation of this new system may negatively impact our business operation and harm our operating results.
We rely on computerized inventory and management systems to coordinate and manage the activities in our integration business, as well as to communicate inventory and shipment information to our vendors and customers. Our ability to rapidly process incoming deliveries, track inventory through the integration process, and process shipments in a timely manner are essential to the operations of our integration business. As we introduce a new ERP system to perform these functions for our warehouse, integration and other operations functions, any challenges in the implementation of the system, changes to processes or errors in functionality where such systems fail to adequately perform as designed, could adversely affect our business and harm our operating results. For financial reporting purposes, we began to use this new enterprise system as our system of record with effect from October 1, 2022. In 2025, we expect to deploy the system across all of our business units and integrate it into our financial reporting systems, which is part of the same ERP system.
The level of our procurement business may fluctuate significantly on a quarterly basis, requiring additional working capital to grow.
Due to the nature of our procurement business, we have experienced material fluctuations in our quarterly revenues from these services, which has had a material impact on our quarterly and annual revenues and profits. We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary way to finance these activities and the business has minimal costs in periods of low volume partially mitigating financial risk. However, depending on the size of potential procurement and reseller contracts, we may be required to procure material amounts of hardware, software, and professional services from other third parties and there can be no guarantee that our existing sources of liquidity or available trade finance will be sufficient to enable us to finance these transactions.
Modular data centers (MDCs) typically have a lifespan of 6-10 years unless they are updated with new IT equipment. As they near the end of their useful life, customers can either perform maintenance to extend the MDCs' lifespan or terminate maintenance contracts for those MDCs. If customers terminate their annual maintenance contracts, it could negatively impact our maintenance revenues and profitability unless they replace the units with new MDCs. While our history suggests that customers willmay replace MDCs with new modules subject to annual maintenance contracts, the time period between these two events could result in a decrease in our maintenance and overall revenue in our facilities management business. In 2024 and 2025, we have seen a general decrease in the number of MDCs for which we provide annual maintenance contracts, as more MDCs are being retired compared to the number of new MDCs being deployed. We anticipate a reversal of that trend, but there can be no assurance of such reversal, or the time frame in which it might occur.
The mission-critical information technology industry in which we operate is highly competitive and continues to become more competitive. We often compete against divisions of large information technology consulting and integration companies, including several large domestic companies that may have financial, technical and marketing resources that exceed our own. These larger competitors have an infrastructure and support greater than ours,ours. and accordingly,Accordingly, we continue to experience some price pressure as some companies are willing to take on projects at lower margins. Our competitors may develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position. Our size oftenoccasionally prevents us from bidding on larger, more profitable projects, which significantly reduces our growth opportunities. Although our customers currently outsource a significant portion of these services to us and our competitors, we can offer no assurance that our existing or prospective customers will continue to outsource specialty contracting services to us in the future.
Other than our multi-yearlong-term AI rack integration agreement which was signed in 2024,2024 and amended and extended in 2025, most of our contracts are cancelable on short notice by the customer either at its convenience or upon our default. If one of our customers terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profit from that contract. If one of our customers terminates the contract due to our default, we could be liable for excess costs incurred by the customer in re-procuring services from another source, as well as other costs. Many of our contracts, including our service agreements, are periodically open to bid. We may not be the successful bidder on our existing contracts that are re-bid. We also provide a portion of our services on a non-recurring, project-by-project basis. We could experience a reduction in our revenue, profitability and liquidity if our customers cancel a significant number of contracts, if we fail to win a significant number of our existing contracts upon re-bid, or if we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects. In addition, we provide services under certain master service agreements. If these agreements are terminated, we would be unable to provide ongoing services to those customers.
We typically submit change orders under some of our contracts for payment of work performed beyond the initial contractual requirements. The applicable customers may not approve or may contest these change orders, and we cannot assureprovide youassurance that these claims will be approved in whole, in part or at all. If these claims are not approved, our results of operations could be adversely impacted.
Under some of our maintenance contractscontracts, we provide limited warranties for the continued performance of equipment, including batteries and actuators used in modular data centers.MDCs. We estimate the anticipated failure or replacement rate of this equipment, but if a customer location experienced a failure rate of equipment greater than we anticipated, we would incur higher equipment replacement costs and incur a loss on that maintenance contract, and thiswhich could potentially have a material negative impact on our profitability and liquidity.
The mission-critical information technology industry is characterized by rapid technological change, intense competition and changing consumer and data center needs. We generate a significant portion of our revenues from customers in the mission-critical information technology industry. New technologies, or upgrades to existing technologies by customers, could reduce the need for our services and adversely affect our revenues and profitability. Improvements in existing technology may allow companies to improve their networks without physically upgrading them. Reduced demand for our services or the loss of a significant customer or end-user could adversely affect theour results of operations, cash flows and liquidity.
Our contract performance may involve subcontracts with other companies upon which we rely to perform all or a portion of the work we are obligatedobliged to deliver to our customers. Our inability to find and engage appropriate subcontractors or a failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely affect our ability to perform our obligations as a prime contractor.
In extreme cases, a subcontractor’s performance deficiency could result in the customer terminating the contract for default with us.us due to our default. A default termination could expose us to liability for excess costs of procurement by the customer and have a material adverse effect on our ability to compete for future contracts and task orders.
A cybersecurity incident, including one affecting our third-party service providers, could materially disrupt our operations, expose us to liability and subject us to mandatory public disclosure under SEC rules.
Our operations depend on the availability, integrity and security of our information technology systems and those of our third-party vendors. We face ongoing threats from ransomware, data exfiltration, business email compromise, insider threats and other sophisticated attacks. Because we integrate high-value AI-enabled hardware and maintain operational data relating to customers, we may be an attractive target for threat actors.
A significant cybersecurity incident could disrupt warehouse and integration operations, delay customer deliveries, impair billing and collections, or result in unauthorized access to confidential or proprietary information. Such an incident could expose us to contractual claims, indemnification obligations, litigation, regulatory inquiries, remediation costs and reputational harm. Disruptions affecting our ERP or financial systems could also impair our ability to timely process transactions or prepare financial reports.
In addition, under SEC rules, a cybersecurity incident determined to be material would require prompt public disclosure, which could increase volatility in the trading price of our common stock and heighten scrutiny from customers, regulators and investors. Although we maintain cybersecurity risk management processes, no system can eliminate all risks, and any material cybersecurity incident could materially and adversely affect our business, financial condition and results of operations.
We have identified a material weakness in our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information.
In connection with the preparation of our financial statements for the year ended December 31, 2024, and as discussed in Item 9A – “Controls and Procedures,” we identified a material weakness in our controls relating to the ineffective design of certain management review controls across the Company’s financial statements, leading to adjustments that were and could have been material to our 2024 consolidated financial statements. Due to the fact that our internal controls over financial reporting did not identify, prevent or detect these risks of material misstatements, we determined this indicated a material weakness in our internal controls over financial reporting at that date. We believe the root causes of the control deficiencies are primarily a number of manual processes in our closing process, combined with challenges in properly segregating duties due to the relatively small size of our accounting department, additional controls needed, and user access for certain information technology systems that support the Company’s financial reporting process.
While we have enacted a number of control enhancements to remediate this material weakness, we have not yet fully remediated all deficiencies that led to the conclusion that we had a material weakness. As a result, we continue to conclude that this material weakness remains at December 31, 2025.
Furthermore, we cannot provide any assurances that we have identified all material weaknesses. In the future, it is possible that additional material weaknesses or significant deficiencies may be identified that we may be unable to remediate timely. If we fail to maintain effective systems, controls and procedures, including disclosure controls and procedures and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations and prevent fraud could be adversely impacted. While we have plans to remediate this material weakness, failure to achieve this goal effectively or in a timely manner could adversely impact our ability to maintain an effective internal control environment and our financial results.
Security breaches and attacks on our computer systems could lead to significant costs and disruptions that could harm our business, financial results and reputation.
We are reliant upon a number of third-party and internally developed software programs to operate our business. We store and transmit our own as well as customer information and data, including individual data of and about their end-user customers. Maintaining the security and availability of our services, network and internal IT systems and the security of information we hold is a critical issue for us and our customers. Any software failure or corruption, including cyber-based attacks or network security breaches, could lead to the dissemination of proprietary information or sensitive, personal or confidential data about us, our employees, customers and end-user customers, could threaten our ability to provide services to our customers, generate negative publicity about us, erode our customers’ confidence in our ability to handle their technology assets, result in litigation and increased legal liability or costs or lead to government inquiry or oversight. The occurrence of any of these events could harm our business or damage our brand and reputation, lead to the loss of customers and higher expenses, and possibly impede our present and future success in retaining and attracting new customers.
A successful assault on our infrastructure could damage our reputation and could adversely affect our financial condition. Similar security risks exist with respect to our business partners and the third-party vendors we rely on for aspects of our information technology infrastructure, support services and administrative functions. As a result, we are subject to the risk that the activities of our business partners and third-party vendors may adversely affect our business even if an attack or breach does not directly impact our systems.
Because we do not currently intend to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including, among others, our results of operations, financial condition and cash requirements, business prospects, and the terms of our credit facility and other financing arrangements. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which stockholders purchased their shares.
Our insiders beneficially own a significant portion of our outstanding common stock. Future sales of common stock by these insiders may adversely affect the market price of our common stock.
Our officers, directors and their affiliates beneficially own approximately 7.0 million shares of common stock or approximately 28% of our outstanding common shares as of March 30, 2025. Stock sales by our directors and officers are subject to compliance with our Code of Conduct and the preapproval process from the Chief Financial Officer. Sales of a substantial number of these shares in the public market could decrease the market price of our common stock. In addition, the perception that such sales might occur may cause the market price of our common stock to decline. Future issuances or sales of our common stock could have an adverse effect on the market price of our common stock.
Management's Discussion & Analysis (MD&A)
New heading “Integration services”
New heading “Depreciation of production-related fixed assets”
New heading “Inventory Valuation”
New heading “Non-GAAP Revenue, Gross Profit and Gross Margins”
New heading “Depreciation and Amortization Outside of Cost of Revenues”
New heading “Bank Factoring Fees”
New heading “Loss on Sale or Disposal of Assets”
Removed heading “Shipping and handling costs”
Removed heading “Comparison of 2024 to 2023”
Removed heading “Depreciation expense”
Removed heading “Comparison of 2023 to 2022”
Removed heading “Cost of Revenue”
Removed heading “Selling, General and Administrative Expenses”
Removed heading “Operating income”
Removed heading “Interest expense, net”
Removed heading “Income tax expense”
Removed heading “Net income (loss)”
Removed heading “Recently Adopted Accounting Guidance”
Removed heading “Recently Issued Accounting Pronouncements”
Largest changes
“As of December 31, 2024, the Company had an accumulated deficit of $60.3 million. Although we reported a small net income of $0.1 million in 2023 and a significantly improved net income of $6.0 million in 2024, we do have a history of operating and net losses over the preceding several years which were due, in part, to the effects of COVID-19 and subsequent supply chain constraints. …”see in full comparison
“Management believes that we will be able to generate sufficient cash flows and liquidity as described above, as we have been able to grow our revenues and order backlog and seen an improvement in supply chain constraints, as well as a significant and sustained improvement in our earnings since June 2024. We believe that we will continue to be profitable on a quarterly and annual basis in 2025. As a result, management has concluded that there is no substantial doubt about the Company’s ability to continue as a going concern. …”see in full comparison
“In 2024, we signed a multi-year agreement to maintain a facility and trained staffing levels to integrate AI-enabled racks for a key customer. In addition to the fixed monthly fees to which we are entitled under that agreement, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. …”see in full comparison
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, we accelerated the revenue recognition and depreciation of those assets in the fourth quarter of 2025. The acceleration of recognition of the reimbursement amounted to approximately $0.8 million which is included in the 2025 systems integration revenues; the acceleration of depreciation of these assets amounted to $0.7 million, and is reported on the face of our income statement as “loss on sale or disposal of assets.” Our Round Rock facility is currently idle, as we seek additional business to utilize the space or to sublease the space if not used in our operations.see in full comparison
“The prior year period included a $7.3 million decrease in accounts payable, as we paid for procurement activities that had been completed near the end of 2022 but for which we had not yet had to pay vendors. The current period accounts payable increased $39.0 million. Somewhat offsetting this was an increase of $12.7 million in contract and other receivables and a $15.3 million growth inventories in the current year largely related to procurement activities ongoing at year-end, and to a smaller degree to support our growth in the integration services business. …”see in full comparison
Full comparison: every changed paragraph (137)
The following discussion contains statements that are forward-looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of, among other reasons, factors discussed in Item 1A – Risk Factors and elsewhere in this Annual Report. The commentary should be read in conjunction with the consolidated financial statements and related notes and other statistical information included in this Annual Report.
In this section, we discuss the results of our operations for the year ended December 31, 2025 compared to the year ended December 31, 2024. For a discussion of the year ended December 31, 2024 compared to the year ended December 31, 2023, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024.
TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex Artificial Intelligence (AI) technologies, planning, design, deployment, maintenance, refreshmaintenance and take-backrefresh 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. OurBeginning in 2024, our systems integration services have recently been enhanced to include integration of Artificial Intelligence (AI) enabled data center server racks. TSS was incorporated in Delaware in December 2004. Our corporate offices and our integration facility are located in Round Rock, Texas.
We supportdeliver 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 2023,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 generativegenerative, 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.
Over the last ten yearsyears, we have focusedoptimized our business onby providing world-class integration services to our customer base. As computing technologies evolve,evolve and as we see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our rack and systems integration business and capabilities to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM (original equipment manufacturer) strategic customer to win contracts and to provide business to us under a Master Relationship Agreement. The loss of orA material decline in volume from, or loss of business from this OEM customer would have a material effect on our results. Our operational focus is to ensure this doesn’tdoes happen.not occur.
Most of the components used in our systems integration business are consigned to us by our largest OEM customer or its end-user customers. Thus, our revenues reflect only the services we perform,provide, and the consigned components are not reflected in our incomestatement statementof operations or on our balance sheet. We also offer our customers procurement services whereby we procure third-party hardware, software and services on their behalf. Our configuration and integration serviceservices businesses often integrate these components to deliver a complete system to our customers.
In some cases, in the performance of procurement services, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party. However, we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction. These procurement services allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher profits on integration projects by broadening our revenue and customer base.
In October 2024, we signed a multi-yearlong-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 existingprior facility, we are movingmoved our headquarters and production facility to a new location in earlyMay 20252025. andThrough anticipateDecember capital31, expenditures2025, ofwe have invested approximately $25$40 million to $30 million forin improvements to that leased facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled (“DLC”) computer racks. This is greater than the $20 million - $25 million we initially expected to invest in the facility, primarily in response to requests from our primary customer to increase the available power and cooling capabilities beyond the initial scope. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the planned capital expenditures, direct and indirect labor related to this activity, and all facility and related costscosts. In December 2025, we signed an amendment to the long-term agreement whereby both parties agreed to extend the term of the agreement for thean portionadditional oftwo ouryears facilitybeyond allocatedits original multi-year term, with automatic one-year renewals if not earlier terminated, and to thisprovide activity.pricing updates to account for increased power consumption and capital expenditures. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement with our customer provides reasonable assurance to us that absent our material breach of the agreement or our termination of the agreement, the revenues we earn from this arrangement will consistently be sufficient to cover the aforementioned costs we expect to incur in fulfilling our obligations. Our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, the other party would be relieved of any further obligation. Funding sources for the build-out costs at the new facility include approximately $6.8 million contributed by our landlord, $20$25 million from atwo constructionrelated loanbank fromterm Susser Bank,loans, and cash on handhand. We borrowed the final $5 million under the term loan in the third quarter of 2025 and we received the $6.8 million of tenant improvement funds from our landlord in the fourth quarter of 2025. Those funds reimbursed us for thecapital remainderexpenditures we had previously funded using cash on hand. We paid down $5 million of theour costs.outstanding Thedebt constructionusing loanpreviously isrestricted expandablecash upwhich was released in December 2025 pursuant to $25our milliondebt with bank approval.agreement.
The volume of transactions we engaged in with our strategic procurement services grew substantially in 2023the andyear againended inDecember 2024.31, 2025 compared to the prior year. Customers value our ability to source disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported revenues will reflect only our fees earned in the transaction (“net deals”). If the procurement activities include integration services or other value-add work beyond just the procurement activity, the transactionstransaction is recorded at its gross value (“gross deals”), and revenue and costs are allocated to the procurement and systems integration segments based on the value created in each and the effort involved to fulfill the contracts. Overall, we were able to increase our recorded revenues from procurement transactions, representing only the revenues allocated to the procurement segment, by $79.0 million or 205%, compared to 2023. The aggregate gross value of all procurement transactions, regardless of whether they were recorded as gross deals or net deals increased from $123.2 million in 2023 to $169.1 million in 2024. Integration work related to these procurement activities is recorded separately in the systems integration segment.
Our total revenues in 20242025 were $148.1$245.7 million, a $93.7$97.6 million or 172%66% increase from our 20232024 revenues of $54.4$148.1 million. Improvement was seen in all three of our major revenue streams,million, with the majority of this increase coming from $79.0$80.0 million (205%68%) growth in our procurement business and $13.8$17.7 million (157%78%) growth in our systems integration businesses. The systems integration business growth was driven primarily by the significant increase in rack integration of AI-enabled computer racks. OurThese effortsincreases were partially offset by a $0.1 million (1%) decrease in this were rewarded by winning a multi-year agreement with our largest OEM customer to continue AI rack integration for them at an expected minimum weekly volume. We also saw a 13% growth in revenuesrevenue from the facilities management segment, fromprimarily $7.1 milliondue to $8.0a milliondecrease in 2024.maintenance revenues largely offset by an increase in discrete projects.
The following table presents our revenues disaggregated by timing of revenue recognition (in ’000’s)
The following table presents our revenues disaggregated by contract type (in ’000’s)
Our gross profits increased by $11.4$10.0 million or 103%45% compared to 2023,2024, mainly due to the higher volumes of activity in our procurement and systems integration businesses, including our AI rack integration activity.activity, combined with margin expansion on our procurement activities. In addition to earning revenue for completing AI rack integrations, our multi-yearlong-term agreement includes weekly volume commitments as well as certain fixed fees,fees for multiple years, which we believe will be sufficient to cover our fixed and variable costs incurred in fulfilling our obligations under the agreement. Specifically, we believe the fees received under this agreementagreement, and subsequent amendment, will be sufficient to cover all of our direct labor, labor training, power consumption and other variable costs, as well as indirect labor, rent and related facility costs for the portion of our factory allocated to this activity, debt service for the assets added to support this business, and other smaller fixed costs that we will incur to perform our obligations under this agreement. If we experience periodic lulls in demand or if our customer has extended periods of inability to secure parts, we have agreed to seek opportunities to scale back a portion of our direct labor and temporary employees used in this activity, primarily in positions that can be refilled and retrained fairly quickly as demand or supply chain issues are resolved, and to in turn reduce the variable fees charged to our customer under this agreement. We believe this structure demonstrates our desire to help control the customer’s costs while protecting our financial results by reducing our fee to them only if our own internal labor costs also are reduced. Our blended gross profit margin as a percentage of sales decreased to 13% in 2025 from 15% in 2024 from 20% in 2023.2024. The primary cause of the decrease in blended gross profit margin percentage was the increase in volume of our procurement business as a proportion of our total revenue, where we generally earn much lower margins on product purchase/resell services than we do with our traditional maintenance and integration services. AsWhile moregross fully discussed below, we saw improvementsprofits in the systems integration business grew by 30%, the margins forrealized bothin that line of business decreased from 42% in 2024 to 31% in 2025. Margins in the facilities management linesegment ofremained businessrobust and therelatively systemsconstant integrationat businesses, and when viewed on a gross value basis, also improved our margins60% in the2025 procurementcompared business.to The driver of the decrease62% in the overall blended margin was the fact that a greater portion of our procurement activity in 2024 was “gross deals” whereas the majority of the 2023 procurement activity was from “net deals.”2024.
The 66% growth in total revenues, combined with the slight decrease in blended gross margins, translated to a 45% increase in gross profit from 2024 to 2025. Net of an increase in operating costs, primarily administrative costs, operating income increased by $0.6 million, or 10%. Due to our continued positive earnings, we determined it was more likely than not that we would be able to utilize our deferred tax assets and released almost all of the previously recognized valuation allowance. This release drove the $7.6 million income tax benefit, and in combination with our increased operating income and $1.1 million increase in interest income, contributed to a total growth in net income in 2025 of 153%. Net income for the year ended December 31, 2025 was $15.1 million compared to $6.0 million net income in the prior year. In prior periods, we reported our bank factoring fees in the “interest expense” caption on our income statements. In the current period, we began reporting bank factoring fees separately as a deduction when computing operating income, and interest expense now reflects only the interest expense related to our bank debt.
With all expense lines growing at a rate slower than the growth in revenues, we leveraged the 172% growth in consolidated revenues in 2024 into a 386% increase in operating income and 7,976% growth in net income compared to 2023.
We ended 20242025 with $23.2$85.5 million of cash on hand, an increase of $11.4$62.3 million from the balance at the end of 2023.2024. This increase was driven by the $6.0$34.9 million netof incomecash flow from operations during 20242025, $9.8 million of net financing obtained from debt proceeds less payments made during the year, and $55.3 million from our public offering of common stock completed in August 2025. The increase in cash flow from operations was tied to the $15.1 million of net income, combined with timing differences stemmingon receipts from thecustomers net of payments to vendors specifically in relation to an elevated level of procurement businessactivity increasingongoing nearat year-end, due to us being paid more quickly than we must pay our vendors.year-end. These inflows were somewhat offset by $4.5$32.7 million cash used in investing related primarily to the build-out of our new integration facility, and $4.9 million of cash used to repurchase shares from employees as a means for them to satisfy tax withholding requirements or pay the exercise price upon the vesting of restricted stock and exercise of stock options. The taxes due on such activities increased significantly in 2024 in direct relation to the increase in our prevailing stock price.
We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centersMDCs during the contract term. Our contract terms typically are one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services on a ratable basisratably over the contract term. We can mitigate our exposure to credit losses by discontinuing services in the event of non-payment. However, our history of non-payments and bad debt expenses has been insignificant.
Integration services
Pursuant to a long-term agreement signed in 2024 and subsequent amendment signed in December 2025 and effective November 1, 2025, we also recognize revenue monthly at contractually based amounts for certain billable fixed and facility costs and trained staffing levels to support the weekly quantity of AI-enabled racks, with staffing fees reduced for any under-staffing. The fee for staffing is based on defined services as transferred to the customer and is not variable consideration because the customer’s usage is known weekly and is not contingent on the occurrence of any future events or subject to any estimation.
The amendment to this agreement signed in December 2025 adjusted pricing primarily to compensate us for the incremental capital investments and power costs that we incurred to meet the customer’s needs and extended the agreement by an additional two years past what was already a multi-year term, and automatic one year renewals after that unless either party elects to terminate it at the end of the initial term.
In 2024, we signed a multi-year agreement to maintain a facility and trained staffing levels to integrate AI-enabled racks for a key customer. In addition to the fixed monthly fees to which we are entitled under that agreement, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business that are largely out of our control, our customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we cannot meet the minimum weekly volume due to our inefficiency, such as production down time or labor shortages compared to agreed-upon levels, we will reduce the fee and bill only for the quantity of racks that we actually configured or could have configured, given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. Under this agreement, we recognize revenue monthly for maintaining the facility and trained staffing levels to support the weekly quantity of racks our customer has contractually requested we be ready to integrate, with the staffing fees reduced for any intentional or unintentional under-staffing. The fee for staffing is not variable consideration because the customer’s usage is known weekly and is not contingent on the occurrence of any future events or subject to any estimation.
We typically extend credit terms to our integration customers based on their creditworthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-10530-80 days of invoicing. An allowance for doubtfulcredit accountslosses is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness.credit worthiness. As of December 31, 2024,2025, andwe 2023,had ourno allowance for doubtfulcredit accountslosses, compared to $7,000 recorded as of December 31, 2024. In 2025, we were successful in collecting the $7,000 that was $7,000.reserved in 2024, resulting in the removal of that reserve.
Equipment and Material sales
We generate revenues from fees we charge our customers for other services, including repairs or other services not covered under maintenance contracts; installation and servicing of equipment, including modular data centersMDCs; and other fixed-price services including repair, design and project management services, or the moving of equipment to a different location.services. In some cases, we arrange for a third party to perform warranty“break-fix” and servicing of equipment,equipment upon customer request, and in these instances, we recognize revenue as the amount of any fees or commissions thatto which we expect to be entitled to.entitled. Other services are typically invoiced upon completion of services or completion of milestones. We record accounts receivable at the time of completion when our right to consideration becomes unconditional. In an effort to further diversify our revenue streams, we offered the service of project-managing the movement of data center equipment in portions of 2024 and 2025. During 2025, we ceased offering this service as it proved to not meet our profit expectations.
We generate revenues from fees we charge our customers to procure third-party hardware, software and professional services on their behalf, some of which are then used in our integration services as we integrate these components to deliver a completed system to our customer. We recognize our procurement services revenues upon completion of the procurement activity.activity or delivery of the completed product depending on the performance obligation. For any procurement activities in which we somehow transform the product, the revenues recognized on these transactions are the gross sales amount of the transaction, and we recognize offsetting costs of salesrevenues for any costs we incur to procure the related goods (“gross deals”). In some cases, we arrange for the purchase of third-party hardware, software or professional services that are to be provided directly to our customers by another party andparty, we have no control of the goods before they are transferred to the customercustomer, and we do not transform the product in any way. In these instances, we are acting as an agent in the transaction and recognize revenue on a net basis, recording only the amount of any fee or commissions thatto which we expect to be entitled to after paying the other party for the goods or services provided to the customer (“net deals”). Accounts receivable from our procurement activities are typically due within 80 days of invoicing. The majority of the procurement activities generally involve us transforming the product, and as such the majoritymost of these transactions are recorded asgross. gross deals. In order toTo accelerate the time period in which we receive payment,payment and optimize our working capital, we generally factor the procurement services receivables utilizing a program that we estimate has an effective annualized interest rate below the rate at which we could borrow funds. Regardless of whether the transaction is recorded as a gross transactiondeal or a net transaction,deal, the interestfactoring fees we are charged through the factoring program isare based on the gross value of theeach transaction.
Sales taxes
Sales (and similar) taxes that are imposed on our sales and collected from customers are excluded from revenues.
Shipping and handling costs
Costs for shipping and handling activities, including those activities that occur subsequent to transfer of control to the customer, are recorded as cost of sales and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has transferred to the customer.
Remaining Performance Obligations and Deferred Revenue
Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of one year or less, we have elected the practical expedient applicable to such contracts and we do not disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of December 31, 2024,2025, deferred revenue of $3,384,000 includes $1,476,000 of ourtotal remaining performance obligations for our maintenance contracts, all of which are expected to be recognized within one year, and $1,908,000 relates to procurement and integration services where we have yet to complete our services for our customers. Of the $1,908,000 deferred revenues related to procurement and integration services, $1,137,000 is expected to be recognized within one year, and $771,000 is expected to be recognized beyond one year. Contract liabilities, consisting of deferred revenuesrevenue, were $3,370,000$129 onmillion. DecemberThe 31,remaining 2023,performance andobligations $2,080,000 on December 31, 2022.include:
Contract liabilities consisting of deferred revenues were $3,384,000 on December 31, 2024, and $3,370,000 on December 31, 2023. Substantially all of the recorded deferred revenues at December 31, 2024 and December 31, 2023 had been earned and recorded as revenues in the one year periods following those dates.
Depreciation of production-related fixed assets
Depreciation of fixed assets that are related specifically to revenue-generating activities is reported as a separate component of cost of revenues. As these amounts were immaterial in prior years, these costs were excluded from cost of revenues and included in Depreciation and Amortization in prior year presentations.
We recorded goodwill and intangiblesintangible assets with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. Intangible assets with finitedefinite lives are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is not amortized. The recorded goodwill is allocated to the reporting unit to which the underlying transaction relates.
WeU. S. GAAP requires us to perform an impairment test of goodwill annuallyon asan ofannual December 31,basis or whenever events or circumstances make it more likely than not that impairment of goodwill may have occurred. As part of the annual impairment test, we review for indicators of impairment as “Step Zero” of the annual impairment test as defined by U.S. GAAP and if any exist, we compare the fair value of the reporting unit with its carrying amount. If that fair value exceeds the carrying amount, no impairment charge is required to be recorded. If the carrying value exceeds the reporting unit’s fair value, we would recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. If necessary, the fair value of a reporting unit will be determined using a discounted cash flow,flow analysis, which requires the use of estimates and assumptions. Significant assumptions that may be required include forecasted operating results, and the determination of an appropriate discount rate. Actual results may differ from forecasted results, which may have a material impact on the conclusions reached.
We also review intangible assets with definite lives for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.
We have elected to use December 31 as our annual assessment date. As circumstances change that could affect the recoverability of the carrying amount of the assetsgoodwill during an interim period, we will evaluate our indefinite lived intangible assetsgoodwill for impairment. The Company performed a quantitativequalitative analysis of our indefinite lived intangible assetsgoodwill on December 31, 2024,2025, and 20232024 and concluded there was no impairment. The valuation results indicated that the fair value of our reporting units was greater than the carrying value, including goodwill,value for each of our reporting units. Thus, we concluded that there was no goodwill impairment on December 31, 2024,2025, or 2023 for our goodwill and other long-lived intangible assets.2024. On December 31, 2024,2025, and 2023,2024, the carrying value of goodwill was $0.8 million.
In any period with a reported value of intangible assets with definite lives, our policy is to review those intangible assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset. Our recorded intangible assets with definite lives were fully amortized at December 31, 2025 and 2024; accordingly, no such impairment review was necessary during 2024 or 2025.
Allowance for DoubtfulCredit AccountsLosses
We estimate an allowance for doubtfulcredit accountslosses based on factors related to the specific credit risk of each customer. Historically our credit losses have been minimal. We perform credit evaluations of new customers and may require prepayments or use of bank instruments such as trade letters of credit to mitigate credit risk. We monitor outstanding amounts to limit our credit exposure to individual accounts. We continue to pursue collection even if we have fully provided for an account balance.
We account for stock-based compensation using a fair-value based recognition method. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized ratably over the requisite service period of the award. For grants with performance requirements, expense recognition begins only once the achievement of the performance criteria is deemed probable. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information that can change significantly over time. A small change in estimates can have a relatively large change in the estimated valuation.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis and specific identification. The cost basis of our inventory is reduced for any products that are considered excess or obsolete based on assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.
Income Taxes
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets that are not more likely than not to be realized. We monitor the realizability of our deferred tax assets taking into account all relevant factors at each reporting period. In completing our assessment of realizability of our deferred tax assets, we consider our history of income (loss) measured at pre-tax income (loss) adjusted for permanent book-tax differences on a jurisdictional basis, volatility in actual earnings, excess tax benefits related to stock-based compensation in recent prior years, and impacts of the timing of reversal of existing temporary differences. We also rely on our assessment of the Company’s projected future results of business operations, including uncertainty in future operating results relative to historical results, volatility in the market price of our common stock and its performance over time, variable macroeconomic conditions impacting our ability to forecast future taxable income, and changes in business that may affect the existence and magnitude of future taxable income. Our valuation allowance assessment is based on our best estimate of future results considering all available information.
We are required to file income tax returns in the U.S. which requires us to interpret the applicable tax laws and regulations. Such returns are subject to audit by the various federal and state taxing authorities, who may disagree with respect to our tax positions. We believe that our consideration is adequate for all open audit years based on our assessment of many factors, including past experience and interpretations of tax law. We review and update our estimates in light of changing facts and circumstances, such as the closing of a tax audit, the lapse of a statute of limitations or a change in estimate. To the extent that the final tax outcome of these matters differs from our expectations, such differences may impact income tax expense in the period in which such determination is made.
In this section, we discuss the results of our operations for the year ended December 31, 2025 (the “current year” or “2025”) compared to the year ended December 31, 2024 (the “prior year” or “2024”). For a discussion of the year ended December 31, 2024 compared to the year ended December 31, 2023, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024.
Comparison of 2024 to 2023
Unless otherwise noted, all comparisons in this section are between the twelve months ended December 31, 2024 (the “current year” or “2024”) and the twelve months ended December 31, 2023 (the “prior year” or “2023”). Based on our current structure and ways in which the business is managed and viewed at an executive level, we determined that effective in the fourth quarter of 2024, we now have three reportable segments rather than two reportable segments as historically reported. The new procurement reportable segment was previously aggregated with the remainder of the systems integration segment. The systems integration segment and procurement segments are now separated into two reportable segments, with the third reportable segment remaining Facilities Management. Prior year segment information has been recast to conform to the current year presentation.
Revenues consist of fees earned from the planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenues from providing system configuration and integration services, as well as procurement services, to IT equipment vendors. In the quarter ended June 30, 2024, we invested approximately $1.7 million in our Round Rock facility to expand our capacity to integrate generative AI-enabled server racks, including both air cooled and direct-liquid cooled systems. We received a reimbursement from one of our customers for the majority of those investments and are amortizing that reimbursement into service integration revenues over the expected useful life of three years. We began integration services on AI racks in June 2024 and have continued that activity to date. Currently we derive substantially all our revenue from the U.S. market, with an immaterial amount derived from Canada in service of a U.S. based customer.market.
We contract with our customers underwith five primaryvarious contract types: fixed-price service and maintenancemaintenance, time and material, and guaranteed maximum price contracts, all of which are fixed-price exclusive of time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteedGuaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price arrangements which generally generate higher profit margins, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.
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, we accelerated the revenue recognition and depreciation of those assets in the fourth quarter of 2025. The acceleration of recognition of the reimbursement amounted to approximately $0.8 million which is included in the 2025 systems integration revenues; the acceleration of depreciation of these assets amounted to $0.7 million, and is reported on the face of our income statement as “loss on sale or disposal of assets.” Our Round Rock facility is currently idle, as we seek additional business to utilize the space or to sublease the space if not used in our operations.
Our maintenance and integration services traditionally earn higher margins and maintenance contracts typically renew annually, providing consistency and predictability of revenues. In past years, we performed design and project-management services in a concentrated number of high-value contracts for the construction of new data centers. In addition to contributing to large quarterly fluctuations in revenue depending upon project timing, these projects required higher levels of working capital and generated lower margins than our maintenance and integration services. We re-focusedfocus our design and project management services towardson smaller scaled jobs typically connected with addition/move/ or retrofit activities rather than new construction, to obtain better margins and a more predictable pattern of earnings.earnings than are typically seen when such efforts are concentrated in fewer high-value contracts for the construction of new data centers, which would otherwise require greater levels of working capital and tend to yield lower margins. We have also focused on providing maintenance services for modular data centerMDC applications as this market has expanded. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding revenue streams such as procurement services to help drive volume through the integration facility. The expansion into AI-enabled rack integration services which began in June 2024 bolstered both our revenues and our earnings, helping move the systems integration segment from a $1.0 million segment pre-tax loss in the year ended December 31, 2023 to a $5.0 million segment contribution to pre-tax income in 2024. These amounts exclude certain corporate expenses, such as selling, general and administrative costs as well as facility costs and interest income that are not allocated to segments.
Total revenues in 20242025 increased 172%66% to $148.1$245.7 million, with each major revenue stream contributing to the improvement.million. Procurement revenues increased by $79.0$80.0 million (205%68%), and systems integration revenues increased by $13.8$17.7 million (157%78%), andwhile facilities management revenues increaseddecreased by $0.9$0.1 million (13%1%) from 2023.2024.
The $13.8$17.7 million (157%78%) increase in systems integration revenues was due primarily to the growth in integration of AI-enabled computer racks, which began with significant volume in June 2024 and continued at similar volumes throughout the remainder of 2024.2025. WithIn December 2025, we amended the October signing of a multi-yearlong-term agreement signed in 2024, to continue integrating AI-enabled racks at similar volumes, weand expect systems integration revenues to remain significantly above the historical trendtrend, or consistent with the past year for severalthe years.foreseeable future. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required under the terms of this agreement, our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the facility and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to our customer’s material breach of the agreement, they would be relieved of any further obligation. If the customer were to terminate the agreement for convenience, they would continue to be obligated to pay us for the monthly fixed charge, but would no longer have any minimum volume commitments, as discussed below.
In addition to the fixed monthly fees to which we are entitled under that agreement, and subsequent amendment, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business, our primary customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we do not meet the minimum weekly volume due to our production down time or labor shortages in compared to agreed-upon levels, we will reduce the fee, billing only for the quantity of racks we actually configured or could have configured given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. While any reduction in available staff reduces the revenues to which we are entitled under this agreement, we believe our long-term partnership with our customer is strengthened as we help them mitigate a portion of the costs for which they are responsible. The periodic reduction of revenues has a muted impact on our overall results, as we also reduce our labor costs in line with the reduced revenues.
To meet our customers’ evolving requirements for more powerful AI racks and greater cooling capabilities, we invested more in our facility than initially estimated and have increased the electrical power now available in our facility, which substantially increased minimum monthly charges from the local utility provider. From May through December 2025, we were charged a total of approximately $1.5 million of fixed power costs regardless of power actually consumed, plus variable charges for actual power consumption, and are currently incurring monthly fixed power charges of approximately $192,000, plus variable rates for power consumed. We made these additional capital and power investments during the current year with the expectation that they will help us generate greater revenues by increasing volume in future periods.
Among other things, the recent amendment to our long-term agreement allowed us to collect approximately $1.0 million of additional revenues in the fourth quarter of 2025 related to power and infrastructure costs we incurred primarily in the second and third quarters of 2025, but to which we did not previously have a contractual right, so such revenue recognition was deferred until the amendment was signed in December 2025.
The 68% increase in procurement revenues, whichfrom was$117.5 unusuallymillion largein this2024 year,to $197.5 million in 2025, was driven primarily by an increase in purchases from the federal government including several individually large sales, combined with a mix shift with a greater proportion of the revenues coming from gross deals, as opposed to net deals. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some seasonality of these revenues. As the federal government budget ends on September 30 each year, we believe this may generally lead to an increase in procurement revenues in the quarter ending September 30 each year and again in the quarter ending December 31 as federal agencies receive their budgets for the new year. However, we cannot accurately predict when other large procurement activity will occur, such as large purchases from our customers’ enterprise clients. Periodic government shutdowns also impact procurement activity. While the military continues to operate during periods of government shutdown, the placement of purchase orders often requires approval by civilian employees of the federal government who do not continue to work during shutdowns. We do not believe this causes a material loss of sales, but rather decreases our ability to predict when such revenues might be realized.
What changed in the latest 10-Q
Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including the factors discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2025, which could adversely affect our business, financial conditions and future results. There have been no material changes from the risk factors discussed in our Annual Report.
No wording changes found in this section.
Full comparison: every changed paragraph (0)
Management's Discussion & Analysis (MD&A)
New heading “Operating Lease Income”
New heading “Six Months Ended June 30, 2026”
New heading “Non-GAAP Revenue, Gross Profit and Gross Margins”
New heading “Operating Lease Income”
New heading “Cost of Revenues and Lease Operations, and Gross Margins”
New heading “Selling, General and Administrative (SG&A) Expenses”
New heading “Depreciation and Amortization outside cost of revenues”
New heading “Bank Factoring Fees”
New heading “Operating Income”
New heading “Interest Expense”
New heading “Interest Income”
New heading “Income tax expense”
Largest changes
“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. …”see in full comparison
Full comparison: every changed paragraph (78)
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,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 have beenwere enhanced to include integration of AI enabled data center server racks as compared to traditional network, storage and CPU-based compute racks. TSSThat wasexpansion incorporatedof our service offerings necessitated a larger investment in Delawarefixed assets for the electrical power and cooling required by AI enabled racks, and drove a related significant increase in Decemberrevenues 2004.from our systems integration segment. AI rack integration continues to be a key growth contributor to our revenues and earnings.
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 MarchJune 31,30, 2026, we have invested approximately $40$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.
Most of our revenue is generated based on services provided by 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.
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.
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, beginningwhich 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 we expect to contributecontributed 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.
Three Months Ended MarchJune 31,30, 2026
Unless otherwise noted, all comparisons in this section are between the three-month period ended MarchJune 31,30, 2026 (the “current quarter” or “this quarter”) and the three-month period ended MarchJune 31,30, 2025 (the “prior yearprior-year quarter” or “this quarter last year”).
Total revenues in the current quarter decreased 21% to $34.9 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 quarter to quarter, decreased by $14.8 million (45%) in comparison to the prior-year quarter. Due to a margin expansion from 7.7% in the prior-year quarter to 11.0% in the current quarter, as further discussed below, the lower procurement revenues resulted in only a 9.2% decrease in that segment’s contribution to pre-tax income. Facilities management revenues of $2.7 million represent an 84% increase over the prior-year quarter, and systems integration revenues increased by $4.4 million (46%) to $13.9 million in the current quarter.
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.
The $6.6$4.4 million (88%46%) 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,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 forof 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.
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.
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.
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.
The gross value of all procurement transactions decreased 53%49% from the prior yearprior-year quarter, from $106.0$65.7 million to $49.4$33.5 million in the current quarter. Gross profit recognized on all procurement transactions decreased 62%21% from $7.0$2.5 million to $2.7$2.0 million before interest charges. The priordecrease yearin quarterrevenues includedwas anfavorably elevatedmuted levelby ofa salesmargin expansion from 7.7% to the11.0% federalon government,a asGAAP wellbasis asand onefrom individually large transaction3.9% to an6.0% enterprise client, withon a largergross than normal margin in the prior year quarter.basis.
Although the margins are thin,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.
Operating Lease Income
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.
Cost of RevenueRevenues and Lease Operations, and Gross Margins
Gross margins are derived from total revenues and lease income less total cost of revenues and lease operations. Effective May 1, 2026, we began recognizing operating lease income associated with our Round Rock warehousing arrangement. Accordingly, gross profit and gross margin for the current period include the impact of both ASC 606 revenue-generating activities and ASC 842 operating lease activities.
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. OurCost consolidatedof grosslease marginoperations significantlyconsists improved,primarily increasingof fromrent 9.3%expense inand theother priordirect yearoccupancy quartercosts associated with our Round Rock, Texas warehouse facility that are attributable to 15.9%operating inlease theincome currentrecognized quarter.under GrossASC 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.842.
Our consolidated gross margin improved, increasing from 16.4% in the prior-year quarter to 22.8% in the current quarter. Gross margins for the current quarter were 11.0% for the procurement business, 31.3% for the systems integration business, and 57.1% for the facilities management business. In the prior-year quarter, gross margins were 7.7% for the procurement business, 37.5% for the systems integration business and 74.3% for the facilities management business.
Since we earn higher profits when using our own labor, we expect gross margins to improve when our labor mix increases relative to the use of subcontracted labor or third-party labor. Our direct labor costs are relatively fixed in the short-term, and the utilization of direct labor is critical to maximizing our profitability. As we continue to bid and win contracts that require specialized skills that we do not possess, we would expect to have more third-party subcontracted labor to help us fulfill those contracts. In addition, we can face hiring challenges in internally staffing larger contracts. While these factors could lead to a higher ratio of cost of services to revenue, the ability to outsource these activities without carrying a higher level of fixed overhead improves our overall profitability by increasing income, broadening our revenue base and generating a favorable return on invested capital. In periods when we increase the level of IT procurement services, we anticipate that our overall blended gross margin percentages will be lower in those periods, even as our gross profits increase, as the normal margins on procurement activities are lower than the margins from our traditional facilities and systems integration services.
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$1.0 million in the three-month period ended MarchJune 31,30, 2026, with zero$0.6 million reported in the prior yearprior-year quarter.
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%66% in the prior yearprior-year quarter to 63%69% in the current quarter. In dollar terms, our SG&A expenses increased by $0.6$0.8 million (13%17%) due to higher non-cash equity basedequity-based compensation, headcount and related compensation costs to support the growing scale of the organization.organization, including the creation of two new executive positions that we expect to help us expand our offerings, revenues and earnings in future periods.
Depreciation and amortization not allocated to cost of revenues increased from $0.2 million in the prior yearprior-year quarter to $0.3 million in the current quarter due to the general growth in the business.
Bank factoring fees decreased from $1.5$0.9 million in the prior yearprior-year quarter to $0.7$0.5 million in the current quarter.quarter, This isprimarily due to the overallsmaller declineamount of receivables factored 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 the Non-GAAP Revenue, Gross Profit and Gross Margins section above.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.
WeReflecting recognizedthe anmargin expansion, our operating income ofincreased $2.316%, from $1.4 million in the prior-year quarter to $1.6 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 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.
In the current quarter, we recorded interest expense of $0.3 million compared to no interest expense in the prior yearprior-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 yearprior-year quarter were capitalized as part of the build-out costs of our new Georgetown facility.
Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.7$0.6 million compared to $0.4$0.2 million earned in the prior yearprior-year quarter. The cash balance increased primarily due to our raising $55.3 million asin a result of our stock offering completed in August 2025, combined with continued net cash flows from operations.2025.
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 reversedreversed, in the quarter ended December 31, 20252025, the majoritymost of the valuation allowance we had previously recorded against our DTA.
The income tax expense in the current quarter was $0.4 million, or 14.7%22.4% of pre-tax income, compared to $49,000,$69,000, or 1.6%4.4% of pre-tax income in the prior yearprior-year quarter. The current quarter effective tax rate is comprised of federal and state income taxes of 28.2%27.5% of pre-tax income, net of a large discrete tax benefit tied to excess tax benefits on employee stock compensation in the firstcurrent quarter of 2026.period. We expect the effective tax rate in the secondthird through fourth quarters of 2026 to be approximately 26.0%,27.5%, yielding a full-year effective tax rate of approximately 22.7%.23.0%. This could be affected by large discrete items in future periods.
After the $0.4 million charge for income taxes, our net income was $2.3$1.4 million, or $0.08$0.05 per diluted share in the current quarter, compared to net income of $3.0$1.5 million, or $0.12$0.06 per diluted share in the prior yearprior-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.
Six Months Ended June 30, 2026
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”).
Revenues
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.
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.
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.
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.
Non-GAAP Revenue, Gross Profit and Gross Margins
The following table presents the results of our procurement activities, in terms of the gross value of the transactions, regardless of whether they were recorded as gross deals or net deals, along with the recorded values, to aid the analysis of the underlying economics (unaudited, in thousands, except percentages):
The following table provides a reconciliation of the non-GAAP figures presented above to the most closely related GAAP figures presented. We review these non-GAAP figures not as a substitute for the GAAP figures, but to help our internal analysis of the underlying economics of each transaction as we do not believe the GAAP figures are as useful for that purpose as are the non-GAAP measures. We believe presentation of the gross value of procurement revenues is also helpful in forecasting and analyzing bank factoring costs of the related receivables, as the factoring fee is calculated based on the gross value of the transactions (unaudited, in thousands):
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.
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.
Operating Lease Income
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.
Cost of Revenues and Lease Operations, and Gross Margins
Gross margins are derived from total revenues and lease income less total cost of revenues and lease operations. During the second quarter of 2026, we began recognizing operating lease income associated with the Round Rock warehousing and logistics arrangement. Accordingly, gross profit and gross margin for the current period include the impact of both ASC 606 revenue-generating activities and ASC 842 operating lease activities.
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.
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.
Selling, General and Administrative (SG&A) Expenses
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.
Depreciation and Amortization outside cost of revenues
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.
Bank Factoring Fees
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.
Operating Income
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.
Interest Expense
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.
TSSI insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 0 Form 4 filings and open-market sales in 8 filings (5 insiders, 8 trade dates, 524,649 shares, about $8.3M; 6 of these filings say the sales were made under a Rule 10b5-1 trading plan). Net open-market shares: -524,649 (purchases minus sales); net value about -$8.3M.Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
| Trade date | Insider | Transaction | Shares | Price | Value |
|---|---|---|---|---|---|
| 2026-06-27 | Marrott Karl Todd |
Shares withheld for tax | 49,188 | $11.32 | $556.8K |
| 2026-06-07 | Chism Daniel M |
Shares withheld for tax | 15,317 | $13.38 | $204.9K |
| 2026-06-02 | Woodward Peter H |
Open-market sale | 100,000 | $15.48 | $1.5M |
| 2026-06-01 | Brennan Kieran |
Open-market sale | 10,000 | $16.00 | $160.0K |
| 2026-05-29 | Woodward Peter H |
Open-market sale | 200,000 | $16.07 | $3.2M |
| 2026-05-06 | Dewan Darryll E |
Open-market sale |
50,000 | $17.00 | $850.0K |
| 2026-04-22 | Dewan Darryll E |
Open-market sale |
50,000 | $16.00 | $800.0K |
| 2026-04-17 | Marrott Karl Todd |
Open-market sale |
23,636 | $15.11 | $357.1K |
| 2026-04-16 | Marrott Karl Todd |
Open-market sale |
800 | $15.00 | $12.0K |
| 2026-04-14 | Marrott Karl Todd |
Open-market sale |
15,213 | $15.03 | $228.7K |
| 2026-04-14 | Dewan Darryll E |
Open-market sale |
50,000 | $15.00 | $750.0K |
| 2026-04-14 | Chism Daniel M |
Open-market sale |
25,000 | $15.00 | $375.0K |
| 2025-06-27 | Marrott Karl Todd |
Shares withheld for tax | 48,652 | $30.25 | $1.5M |
| 2024-06-27 | Marrott Karl Todd |
Grant/award | 250,000 | — | — |
Well-known investors holding TSSI (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| D. E. Shaw & Co. | 2026-06-30 | 542,913 | $6.7M | 0.0% | Added 192% |
| Millennium Management (Israel Englander) | 2026-06-30 | 220,744 | $2.7M | 0.0% | Reduced 40% |
| AQR Capital Management (Cliff Asness) | 2026-06-30 | 177,912 | $2.2M | 0.0% | Added 454% |
| Citadel Advisors (Ken Griffin) | 2026-06-30 | 140,813 | $1.7M | 0.0% | New position |
| Renaissance Technologies | 2026-06-30 | 138,291 | $1.7M | 0.0% | Added 130% |
| Point72 Asset Management (Steve Cohen) | 2026-06-30 | 89,742 | $1.1M | 0.0% | New position |
| Two Sigma Investments | 2026-06-30 | 49,518 | $644.2K | — | Sold out |