TSS, Inc 10-Q for FY2025 Q3
TSS, Inc. (TSSI)
About this 10-Q
TSS, Inc filed this 10-Q on November 13, 2025, covering the quarter ended September 30, 2025 (FY2025 Q3).
Headline figures
Quarter ended September 30, 2025, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $41.88M
- down 40.2% from $70.07M a year earlier
- Net loss
- $1.5M
- compared with net income of $2.65M a year earlier
- Diluted EPS
- -$0.06
- compared with $0.10 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission file number:
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code
(
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class |
| Ticker Symbol |
| Name of Each Exchange on Which Registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding as of November 11, 2025:
TSS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2025
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Table of Contents |
“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward- looking statements made in this Quarterly Report on Form 10-Q (the “Quarterly Report”), as well as those made in other filings with the SEC.
Forward looking statements can be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee” or other similar words. Such forward looking statements are based on management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward-looking statements include, but are not limited to, those described under "Risk Factors” set forth in Item 1A of this Form 10-Q and Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.
As used herein, except as otherwise indicated by the context, the terms “TSS”, “Company”, “we”, “our” and “us” are used to refer to TSS, Inc. and its subsidiaries.
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| Table of Contents |
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
TSS, Inc.
Condensed Consolidated Balance Sheets
(in thousands except par values)
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| September 30, 2025 (Unaudited) |
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| December 31, 2024 |
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Current Assets: |
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Cash and cash equivalents |
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Contract and other receivables, net |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Lease right-of-use asset |
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Goodwill |
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Restricted cash |
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Other assets |
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Total assets |
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Current Liabilities: |
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Accounts payable and accrued expenses |
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Deferred revenues, current |
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Long-term debt, current |
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Lease liabilities, current |
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Total current liabilities |
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Non-current Liabilities: |
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Long-term debt, non-current |
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Lease liabilities, non-current |
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Deferred revenues, non-current |
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Total non-current liabilities |
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Total liabilities |
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Commitments and Contingencies (Note 1) |
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Stockholders’ Equity: |
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Preferred stock, $.0001 par value; |
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Common stock, $.0001 par value; |
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Additional paid-in capital |
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Treasury stock, at cost; |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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See accompanying notes to the condensed consolidated financial statements.
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| Table of Contents |
TSS, Inc.
Unaudited Consolidated Statements of Operations
(in thousands, except per-share amounts)
|
| Three Months Ended September 30 |
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| Nine Months Ended September 30 |
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| 2025 |
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| 2024 |
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Revenues: |
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Procurement |
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Facilities management |
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System integration |
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Total revenues |
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Cost of revenues |
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Cost of revenues – depreciation |
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Total cost of revenues |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Income (loss) from operations |
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Interest expense |
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Interest (income) |
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Other expense (income) |
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Pre-tax income (loss) |
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Income tax expense |
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Net income (loss) |
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Earnings (loss) per common share - Basic |
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Earnings (loss) per common share - Diluted |
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See accompanying notes to the condensed consolidated financial statements.
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| Table of Contents |
TSS, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
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| Additional |
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| Total |
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| Common Stock |
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| Paid-in |
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| Treasury Stock |
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| Accumulated |
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| Shares |
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| Amount |
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| Capital |
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| Shares |
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| Amount |
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| Deficit |
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| Equity |
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Balance December 31, 2023 |
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Restricted stock vested |
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Treasury shares repurchased |
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Stock-based compensation |
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Net income |
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Balance at March 31, 2024 |
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Restricted stock vested |
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Stock options exercised |
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Treasury shares repurchased |
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Stock-based compensation |
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Net income |
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Balance at June 30, 2024 |
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Restricted stock vested |
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Stock options exercised |
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Treasury shares repurchased |
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Stock-based compensation |
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| - |
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Net income |
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Balance at September 30, 2024 |
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| Additional |
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| Total |
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| Common Stock |
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| Paid-in |
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| Treasury Stock |
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| Accumulated |
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| Stockholders’ |
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| Shares |
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| Amount |
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| Capital |
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| Shares |
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| Amount |
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| Deficit |
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| Equity |
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Balance December 31, 2024 |
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Restricted stock vested |
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| - |
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| - |
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| - |
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Stock options exercised |
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| - |
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Treasury shares repurchased |
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Stock-based compensation |
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Net income |
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Balance at March 31, 2025 |
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Restricted stock vested |
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| - |
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Treasury shares repurchased |
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Treasury shares retired |
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Stock-based compensation |
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Net income |
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Balance at June 30, 2025 |
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| $ |
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Issuance of common stock, net of offering costs |
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Restricted stock vested |
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Stock options exercised |
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| - |
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Treasury shares repurchased |
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Treasury shares retired |
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Stock-based compensation |
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Net (loss) |
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| - |
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Balance at September 30, 2025 |
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| $ |
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See accompanying notes to the condensed consolidated financial statements.
| 3 |
| Table of Contents |
TSS, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
| Nine Months Ended September 30, |
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| 2025 |
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| 2024 |
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Cash Flows from Operating Activities: |
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Net income |
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| $ |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Provision for inventory reserve |
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Amortization of debt issuance costs |
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Changes in operating assets and liabilities: |
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Contract and other receivables |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventories |
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Prepaid expenses and other assets |
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Right-of-use assets |
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Accounts payable and accrued expenses |
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Deferred revenues |
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Operating lease liabilities |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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Net cash used in investing activities |
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Cash Flows from Financing Activities: |
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Proceeds from issuance of long-term debt |
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Repayments of long-term debt |
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| ( | ) |
|
|
| |
Proceeds from exercise of stock options |
|
|
|
|
|
| ||
Proceeds from stock issuance, net of offering costs |
|
|
|
|
|
| ||
Repurchase of treasury stock |
|
| ( | ) |
|
| ( | ) |
Net cash provided by (used in) financing activities |
|
|
|
|
| ( | ) | |
Net increase in cash, cash equivalents and restricted cash |
|
|
|
|
|
| ||
Cash, cash equivalents and restricted cash, beginning of period |
|
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|
|
|
| ||
Cash, cash equivalents and restricted cash, end of period |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
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|
|
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|
|
Cash paid for interest, net of amounts capitalized |
| $ |
|
| $ |
| ||
Cash paid for taxes |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
| $ |
|
| $ |
| ||
Restricted cash, beginning of period |
| $ |
|
| $ |
| ||
Cash, cash equivalents and restricted cash, beginning of period |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
| $ |
|
| $ |
| ||
Restricted cash, end of period |
| $ |
|
| $ |
| ||
Cash, cash equivalents and restricted cash, end of period |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental non-cash investing activities: |
|
|
|
|
|
|
|
|
Additions to capital expenditures financed with accounts payable |
| $ |
|
| $ |
| ||
See accompanying notes to the condensed consolidated financial statements.
| 4 |
| Table of Contents |
TSS, Inc.
Notes to Condensed Consolidated Statements
(unaudited)
Note 1 – Significant Accounting Policies
Description of Business
TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex AI technologies, planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services have been enhanced to include integration of Artificial Intelligence (AI) enabled data center server racks. TSS was incorporated in Delaware in December 2004. In the second quarter of 2025 we relocated our corporate offices and primary integration facility from Round Rock, Texas to Georgetown, Texas and continued to operate a second integration facility at our former corporate office in Round Rock, Texas during the third quarter of 2025.
The preparation of the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U. S. GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates are reasonable and that the actual results will not vary significantly from the estimated amounts.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2024, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the SEC for interim reporting and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations, changes in stockholders’ equity and cash flows. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.
Certain prior year amounts have been reclassified to conform to the current presentation. The reclassifications are: (i) on our statements of operations, we now present revenues from each individual segment whereas the prior year revenues were all presented on a single line item; (ii) on our statements of operations, we now present interest expense and interest income separately whereas we presented a single amount “interest expense, net” in the prior year presentation and (iii) we recast the segment disclosures to present our procurement services as a separate segment consistent with the current year presentation whereas those results were aggregated into the systems integration segment in the prior year presentation. These reclassifications had no net effect on our reported results of operations, financial position or cash flows.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, including money market accounts, and debt.
| 5 |
| Table of Contents |
Based primarily on the short-term nature of cash and cash equivalents, we estimate that their carrying amount approximates their fair value at September 30, 2025 and December 31, 2024. We consider the fair value of our cash and cash equivalents, including money market accounts, to be measured using Level 1 inputs.
As it does not have a quoted market price and its term extends beyond a year, requiring more judgment, we consider our debt balance to be measured using Level 2 inputs. As the debt bears a floating interest rate that is adjusted frequently in line with movements in prevailing interest rates that would be used to discount any future cash flows, we estimate that its carrying value approximates its fair value.
Accounting for Business Combinations
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, is recorded as goodwill.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer contracts, leases, and any other significant assets or liabilities and contingent consideration. Preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.
Revenue Recognition
We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative stand-alone selling prices.
Maintenance services
We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on modular data centers during the contract term. Our contract terms typically are one year in duration, are billed annually in advance, and are non-cancelable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services ratably 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
We generate integration services revenues by providing our customers with customized systems and rack-level integration services. We recognize revenue upon shipment to the customer of the completed systems as this is when we have completed our services and when the customer obtains control of the promised goods.
Pursuant to a multi-year agreement signed in 2024, 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.
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 consideration becomes unconditional. Accounts receivable from our integration customers are typically due within 30-105 days of invoicing. An allowance for credit losses 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. As of September 30, 2025, we had no allowance for credit losses and $
Equipment and Material sales
We generate revenues under fixed price contracts from the sale of data center and related ancillary equipment or materials to customers in the United States. We recognize revenue when the product is shipped to the customer as that is when the customer obtains control of the promised goods and when we have completed our contractual obligations. Typically, we do not receive advance payments for equipment or material sales; however, if we do, we record the advance payment as deferred revenues. Normally we record accounts receivable at the time of shipment, when our right to the consideration has become unconditional. Accounts receivable from our equipment and material sales are typically due within 30-45 days of invoicing.
| 6 |
| Table of Contents |
Deployment and Other services
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 centers; and other fixed-price services including repair, design and project management services, or the moving of equipment to a different location. In some cases, we arrange for a third party to perform “break-fix” and servicing of equipment upon customer request, and in these instances, we recognize revenue as the amount of any fees or commissions to which we expect to be 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.
Procurement services
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. For any procurement activities in which we transform the product, the revenues recognized on these transactions are the gross sales amount of the transaction, and we recognize offsetting costs of revenues 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, we have no control of the goods before they are transferred to the customer, 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 to which we expect to be entitled 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 most of these transactions are recorded gross. To accelerate the time in which we receive payment, 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 deal or a net deal, the interest we are charged through the factoring program is based on the gross value of each transaction.
Revenue by source
The following table presents our revenues disaggregated by reportable segment and by product or service type (in ’000’s):
|
| Three-Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2025 |
|
| 2024 |
|
| 2025 |
|
| 2024 |
| ||||
FACILITIES MANAGEMENT: |
|
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|
|
|
|
|
|
|
|
|
| ||||
Maintenance revenues |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equipment sales, deployment and other services |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Facilities Management revenues |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
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|
SYSTEMS INTEGRATION: |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Integration services |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total Systems Integration revenues |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
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|
|
PROCUREMENT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procurement services |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total Procurement revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
TOTAL REVENUES |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Judgments
We consider several factors in determining that control transfers to the customer upon shipment of equipment or upon completion of our services. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment or completion of the services.
| 7 |
| Table of Contents |
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 after transfer of control to the customer, are recorded as cost of revenues and are expensed as incurred. We accrue costs for shipping and handling activities that occur after control of the promised good or service has been transferred to the customer.
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 September 30, 2025, deferred revenue of $
| · | $ |
| · | $ |
| o | $ |
| o | $ |
Contract liabilities consisting of deferred revenues were $
Concentration of Credit Risk
We are currently economically dependent upon our relationship with a large US-based IT OEM (Original Equipment Manufacturer). If this relationship is unsuccessful or discontinues, our business and revenue will suffer. The loss of or a significant reduction in orders from this customer or the failure to provide adequate products or services to it would significantly reduce our revenue.
The following customer accounted for a significant percentage of our revenues for the periods shown:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2025 |
|
| 2024 |
|
| 2025 |
|
| 2024 |
| ||||
US-based IT OEM |
|
|
|
|
|
|
|
| ||||||||
No other customer represented more than
Non-recourse factoring
We have entered into a factoring agreement with a financial institution to sell certain of our accounts receivable from a US-based IT OEM customer under a non-recourse agreement. Due to the extended payment terms from that customer, we use this factoring arrangement as the effective interest rate implicit in this arrangement is less than the rate at which we could borrow the funds to carry those receivables through their due date. Under the arrangement, we sell certain trade receivables on a non-recourse basis and account for the transaction as a sale of the receivable. The financial institution assumes the full risk of collection, without recourse to the Company in the event of a loss. Debtors are directed to send payments directly to the financial institution. The applicable receivables are removed from our consolidated balance sheet when we receive the cash proceeds. We do not service any factored accounts after the factoring has occurred. We utilize this factoring arrangement as part of our financing for working capital. The table below presents information relevant to this factoring program (in $’000’s):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2025 |
|
| 2024 |
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| 2025 |
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| 2024 |
| ||||
|
|
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|
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|
|
|
|
|
| ||||
Aggregate gross amount factored |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Financing fees paid |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 8 |
| Table of Contents |
Financing fees were recorded as interest expense in our consolidated statements of operations or in deferred costs if the interest related to projects for which revenue has not yet been recognized. The total amounts factored exceed our total recorded revenues, as the factoring fees apply to the gross value of receivables collected through the program, while we record only our agent fee on procurement contracts as revenue for any procurement activity that is shipped directly from third parties to the end customer.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. For awards with performance-based vesting criteria, we recognize expense only once it is deemed probable that the performance criteria will be met. We award shares of restricted stock and stock options to employees, managers, executive officers, and directors for both incentive and retention purposes.
During the three-month and nine-month periods ended September 30, 2025, we incurred approximately $
Cash, cash equivalents, and restricted cash
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of bank time deposits. We had unrestricted cash of $
Contract and Other Receivables
Accounts receivables are recorded at the invoiced amount and may bear interest in the event of late payment under certain contracts.
Allowance for Credit Losses
We estimate an allowance for credit losses based on estimated credit losses, 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 the 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.
The following table summarizes the changes in our allowance for credit losses (in ’000):
|
| Nine Months Ended September 30, |
| |||||
|
| 2025 |
|
| 2024 |
| ||
Balance at beginning of period |
| $ |
|
| $ |
| ||
Additions charged to expense |
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|
| ||
Recovery of amounts previously reserved |
|
| ( | ) |
|
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| |
Amounts written off |
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|
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| ||
Balance at end of period |
| $ |
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| $ |
| ||
| 9 |
| Table of Contents |
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for purchased inventories other than inventory bearing serial numbers which are tracked using specific identification. We write down obsolete inventory or inventory quantities more than our estimated usage to its estimated realizable value less costs to sell, if less than its cost. Inherent in our estimates of net realizable value in determining inventory valuation are estimates related to future demand and technological obsolescence of our products. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventories and our results of operations and financial position could be materially affected.
Property and Equipment
Property and equipment are recorded at cost, including interest incurred during the construction phase of assets financed at least partly with debt. We provide for depreciation using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. Depreciation expense directly related to our revenue producing activities is recorded as a component of cost of revenues in our consolidated statements of operations; the remainder is included in operating expenses. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Goodwill and Intangible Assets
We have recorded goodwill and intangible assets with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. These intangible assets 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.
U. S. GAAP requires us to perform an impairment test of goodwill on an annual 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 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 assets during an interim period, we will evaluate our indefinite lived intangible assets for impairment. At our most recent annual assessment date of December 31, 2024, we identified no such indicators of impairment and determined there was no impairment at that date. In the quarter ended September 30, 2025, we considered relevant matters including macroeconomic and other conditions on our operations and noted no material triggering events or circumstances that occurred during that period that would indicate the carrying value of our goodwill or other long-lived intangible assets was impaired. On September 30, 2025 and December 31, 2024, the carrying value of goodwill was $
Income Taxes
Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The U.S. net operating losses generated prior to 2018 and not utilized can be carried forward for 20 years to offset future taxable income. A full valuation allowance has been recorded against our net deferred tax assets, because we have concluded that under relevant accounting standards it is more likely than not that deferred tax assets will not be realizable. We re-evaluate this assessment quarterly and if we determine, after weighing all positive and all negative evidence available at that time, that it is more likely than not that the deferred tax asset will be realizable, we will remove the valuation allowance at that point in time. As a percentage of our pre-tax earnings, the income tax expense presented on our statement of operations is substantially less than one might normally expect to see, as we are able to utilize our deferred tax asset to offset any current federal income taxes due, and reduce the valuation allowance by an equal amount of the deferred tax asset utilized. The income tax expense recognized represents state income taxes for which we do not have deferred tax assets to offset. We recognize any interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statements of operations.
| 10 |
| Table of Contents |
Earnings Per-Common Share
Basic and diluted earnings per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purposes of determining diluted earnings per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities, if any. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.
Treasury Stock
We account for treasury shares using the cost method. Purchases of shares of common stock are recorded at cost and result in a reduction of stockholders’ equity. We hold repurchased shares in treasury for general corporate purposes, including issuances under various employee compensation plans and from time to time may retire all or a portion of the treasury shares, reducing the issued and treasury share counts. When treasury shares are issued, we use a weighted average cost method. Purchase costs in excess of reissue price are treated as a reduction of retained earnings. Reissue price more than purchase costs is treated as additional paid-in-capital.
Commitments and Contingencies
In the ordinary course of business, the Company may be subject to claims, lawsuits, and proceedings. Management evaluates such matters based on available information and, when necessary, records an accrual for estimated losses. As of September 30, 2025, the Company determined that there were no matters requiring accrual or disclosure as a commitment or contingency under the applicable accounting guidance.
Recently Adopted Accounting Guidance
In November 2023, FASB issued Accounting Standards Update ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ("ASU 2023-07”). ASU 2023-07 improves reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision-maker and included within each reported measure of segment profit (referred to as the "significant expense principle”). We adopted this guidance effective for the annual period ended December 31, 2024. It did not have a material impact on our financial results of operations or financial position, other than the enhanced disclosures. At the same time as adopting this guidance, we also re-assessed our segmentation and determined we now have three reportable segments whereas we have historically had two reportable segments. In interim periods after December 31, 2024, the new guidance is now applied retrospectively for all prior periods presented in the financial statements, and prior period segment results are recast to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In December 2023, FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, this ASU requires certain disclosures of state versus federal income tax expense and taxes paid. This ASU is effective for our Annual Report on Form 10-K for the year ending December 31, 2025, with early adoption permitted. We do not expect the adoption of ASU 2023-09 to have a material impact on our financial statements.
In November 2024, FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40) (“ASU 2024-03”), which will require that entities provide more granular footnote disclosures of the details contained in certain captions on the company’s income statement, such as “Selling, General and Administrative” expenses. This new guidance is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. We have not yet determined all the effects that adoption of this new guidance will have on our statement of operations and related footnote disclosures. We do not expect its adoption to affect our net operating results or financial position.
In July 2025, FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides public companies with a practical expedient in developing reasonable and supportable forecasts as part of estimating expected credit losses. All entities may elect a practical expedient that assumes that current conditions as of the balance sheet date do not change for the remaining life of the asset. Early adoption is permitted. The amendment is effective for annual periods beginning after December 15, 2025, and interim periods within those annual reporting periods. Accordingly, it will first be applicable for our three-month period ending March 31, 2026. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.
| 11 |
| Table of Contents |
In July 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law. This legislation includes changes to the United States federal tax law, which may be subject to further clarification and the issuance of interpretive guidance. We are currently evaluating the impact of the legislation on our consolidated financial statements.
Note 2 – Supplemental Balance Sheet Information
Receivables
Contract and other receivables consisted of the following (in ‘000’s):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Contract and other receivables |
| $ |
|
| $ |
| ||
Allowance for credit losses |
|
|
|
|
| ( | ) | |
Contracts and other receivables, net |
| $ |
|
| $ |
| ||
Contract and other receivables, net were $
Inventories
We state inventories at the lower of cost or net realizable value (in ‘000’s) as follows:
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Raw Materials |
| $ |
|
| $ |
| ||
Work in Process |
|
|
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|
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| ||
Finished Goods |
|
|
|
|
|
| ||
Reserve |
|
| ( | ) |
|
| ( | ) |
Inventories, net |
| $ |
|
| $ |
| ||
Goodwill and Intangible Assets
Goodwill and Intangible Assets consisted of the following (in ‘000’s):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||||||||||
|
| Gross |
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| Gross |
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| Carrying |
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| Accumulated |
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| Carrying |
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| Accumulated |
| ||||
|
| Amount |
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| Amortization |
|
| Amount |
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| Amortization |
| ||||
Intangible assets not subject to amortization: |
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|
| ||||
Goodwill |
| $ |
|
|
|
|
| $ |
|
|
|
| ||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Acquired software |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Goodwill is attributable to the following reportable segments (in ‘000’s):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Facilities Management |
| $ |
|
| $ |
| ||
Systems Integration |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
We recognized no amortization expense related to intangible assets in the three-month or nine-month periods ended September 30, 2025 or in the comparable periods of 2024 as all long-lived intangible assets subject to amortization were fully amortized.
| 12 |
| Table of Contents |
Property and Equipment
Property and equipment consisted of the following (in ’000’s):
|
| Estimated Useful Lives |
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| |||
|
| (years) |
|
|
|
|
|
|
| |||
Trade equipment |
|
|
| $ |
|
|
|
| ||||
Leasehold improvements |
|
|
|
|
|
|
|
| ||||
Furniture and fixtures |
| |
|
|
|
|
|
|
| |||
Computer equipment and software |
|
|
|
|
|
|
|
| ||||
Construction in Process |
| N/A |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| ||
Less accumulated depreciation |
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Property and equipment, net |
|
|
|
|
| $ |
|
| $ |
| ||
Depreciation of property and equipment and amortization of leasehold improvements and software totaled $
The following table presents interest capitalized as property and equipment, as the related debt was used to finance a portion of the capital expenditures (in $000’s):
|
| Three-Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| 2025 |
|
| 2024 |
|
| 2025 |
|
| 2024 |
| ||||
Capitalized interest |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Other Assets
Other assets, non-current is comprised of the following amounts (in $000’s):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Deposits |
| $ |
|
| $ |
| ||
Other non-current assets, net |
|
|
|
|
|
| ||
Balance at end of year |
| $ |
|
| $ |
| ||
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in ’000’s):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Accounts payable |
| $ |
|
| $ |
| ||
Accrued expenses |
|
|
|
|
|
| ||
Compensation, benefits and related taxes |
|
|
|
|
|
| ||
Other accrued expenses |
|
|
|
|
|
| ||
Total accounts payable and accrued expenses |
| $ |
|
| $ |
| ||
Long-Term Debt
Long-term debt, non-current consisted of the following (in ’000’s):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Borrowed funds (bank loan; see Note 3) |
| $ |
|
| $ |
| ||
Less deferred debt issuance costs |
|
| ( | ) |
|
| ( | ) |
Less long-term debt, current portion |
|
| ( | ) |
|
|
| |
Long-term debt, non-current |
| $ |
|
| $ |
| ||
| 13 |
| Table of Contents |
Amortization of deferred debt issuance costs began in the quarter ended June 30, 2025 once construction was substantially complete. We amortized $
Note 3 - Long-Term Debt |
In May 2024, we renewed our revolving line of credit (the “revolving line of credit”) with Susser Bank (“Lender”) pursuant to a Business Loan Agreement (Asset Based) effective May 5, 2024. The obligations under the revolving line of credit were secured by substantially all of our accounts receivable. Our wholly owned subsidiaries jointly and severally guaranteed our obligations under the revolving line of credit. We terminated the revolving line of credit on December 31, 2024 when we entered into a new credit agreement with Susser Bank described below. There were no borrowings outstanding on the revolving credit facility at any point during the periods presented.
On December 31, 2024, we entered into a new Credit Agreement (the “Credit Agreement”) with Susser Bank to fund improvements at the Georgetown, Texas location we leased on December 2, 2024 to which we have now moved our headquarters and the majority of our operations. The Credit Agreement provides for a $
The Credit Agreement includes customary affirmative covenants for secured transactions of this type, including maintaining adequate books and records, periodic financial reporting, compliance with laws, maintenance of insurance, maintenance of assets, timely payment of taxes, and notices of adverse events. It also includes customary negative covenants including incurrence of other indebtedness, mergers, consolidations and transfers of assets and liens on our assets. The Loan Agreement and ancillary documents also include customary events of default, including payment defaults, failure to perform or observe terms, covenants or agreements included in the Loan Agreement and ancillary documents, insolvency and bankruptcy defaults, judgment defaults, material adverse change defaults, and change of ownership defaults.
As of September 30, 2025, all available funds under the Credit Agreement, including the accordion feature, have been drawn.
Note 4- Leasing Arrangements
We have operating leases for our office and integration facilities in both Round Rock, Texas and Georgetown, Texas as well as for certain equipment. Our leases have remaining lease terms of
We determine if an arrangement is a lease at its inception. Operating leases are included in the lease right-of-use assets, current lease liabilities and lease liabilities, non-current, on our consolidated balance sheets. We have elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. We also selected a package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, we did not need to reassess whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.
| 14 |
| Table of Contents |
Right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, with variable lease expense recognized in the period in which the costs are incurred. Variable lease expense is comprised of common area maintenance (CAM), property taxes and property insurance. Components of lease expense and other information is as follows (in ‘000’s):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| 2025 |
|
| 2024 |
|
| 2025 |
|
| 2024 |
| ||||
Operating lease cost: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Variable lease cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total operating lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for operating leases |
|
|
|
|
|
|
|
|
|
|
|
| ||||
New right-of-use assets – operating leases |
|
|
|
|
|
|
|
|
|
|
|
| ||||
The following presents information regarding the Company's operating leases as of September 30:
|
| 2025 |
|
| 2024 |
| ||
Weighted average remaining lease term – operating leases (months) |
|
|
|
|
|
| ||
Weighted average discount rate – operating leases |
|
|
|
| ||||
Future minimum lease payments under non-cancellable leases as of September 30, 2025 were as follows (in ‘000’s):
|
| Fiscal Year |
| |
2025 |
| $ |
| |
2026 |
|
|
| |
2027 |
|
|
| |
2028 |
|
|
| |
2029 |
|
|
| |
2030 |
|
|
| |
Thereafter |
|
|
| |
Total minimum future lease payments |
|
|
| |
Less imputed interest |
|
| ( | ) |
Total |
| $ |
| |
|
|
|
|
|
Reported as of September 30, 2025 (in ‘000’s) : |
|
|
|
|
Current portion of lease liability |
| $ |
| |
Non-current portion of lease liability |
|
|
| |
|
| $ |
| |
During the three-month period ended September 30, 2025, the Company resolved all required contractual contingencies in order to receive the tenant leasehold improvement allowance of $
Note 5 - Earnings (loss) Per-Share
Basic and diluted income (loss) per share is based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for the purpose of determining diluted income per share, includes the effects of dilutive unvested restricted stock, options to purchase common stock and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.
| 15 |
| Table of Contents |
The following table presents a reconciliation of the numerators and denominators of the computations of basic and diluted income (loss) per share from continuing operations. In the table below, income (loss) represents the numerator, and shares represent the denominator (in thousands except per share amounts):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| 2025 |
|
| 2024 |
|
| 2025 |
|
| 2024 |
| ||||
Basic Earnings (Loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| |||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic Earnings (Loss) per share |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| |||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive options and warrants outstanding |
|
| - |
|
|
|
|
|
|
|
|
|
| |||
Number of shares used in diluted per-share computation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted Earnings (Loss) per share |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| |||
For the three-month periods ended September 30, 2025 and 2024, respectively,
In August 2025, we sold
Note 6 - Segment Reporting
Segment information reported in the tables below represents the operating segments of the Company organized in a manner consistent with which separate information is available and for which segment results are evaluated regularly by our President and CEO, who is our chief operating decision-maker (CODM), in assessing performance, allocating resources and awarding incentive compensation. Prior to the fourth quarter of 2024, our activities were organized and managed in two reportable segments: facilities management and systems integration, with our procurement operating segment aggregated into the systems integration reportable segment. In the fourth quarter of 2024, we reorganized our structure such that our CODM now evaluates our operations and allocates resources on the basis of three segments. Accordingly, we determined that we now have three reportable segments as noted below. Comparable prior period amounts presented have been recast to conform with the current period presentation, including the costs allocated to each reportable segment as provided to our CODM. Our revenues are substantially all derived from the U.S. market, and all revenues presented are from external customers; we have no intercompany revenues.
The Company’s reportable segments are as follows:
| · | Procurement: Assists our customers in procuring third-party hardware, software, and professional services on their behalf that are used in our integration services as we integrate these components to deliver a completed system to our customers. Although this activity drives some of the work done in the systems integration business, its activities and financial results are reviewed separately from the systems integration segment results. |
| · | Systems Integration: Integrates IT equipment for OEM vendors and customers to be used inside data center environments, including modular data centers. This includes AI-enabled computer technology as well as more traditional data center equipment. This segment also provides other computer equipment configuration services for our customers. |
| · | Facilities Management: Involved in the design, project management and maintenance of data centers and mission-critical business operations. |
The CODM evaluates the performance of the segments based on segment revenue, gross profit and pre-tax income, including the significant expenses presented separately in the table below. Segment results are exclusive of certain corporate activities and expenses that are not allocated to specific segments, and which are reconciled below to our consolidated pre-tax income.
| 16 |
| Table of Contents |
Other consolidated assets not specifically attributable to or allocated to business segments are principally cash and cash equivalents, prepaids and deposits, certain fixed assets, and operating lease right-of use assets. Other operating expenses in the following tables generally represent property taxes, rent and related costs, travel and entertainment, professional fees, office supplies and other similar items utilized by the specific reportable segments but not separately identified in the tables below as none of the costs is individually significant.
Information regarding our reportable segments is presented below (in thousands):
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Three Months Ended September 30, 2025: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues – depreciation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Segment gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Payroll and benefits excluded from cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other operating expenses (income) |
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other expense (income) |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Segment pre-tax income (loss) |
|
|
|
|
| ( | ) |
|
|
|
|
|
| |||
Capital expenditures |
| $ |
|
| $ |
|
|
|
|
| $ |
| ||||
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Three Months Ended September 30, 2024: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues – depreciation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Segment gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Payroll and benefits excluded from cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other expense (income) |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Segment pre-tax income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Capital expenditures |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 17 |
| Table of Contents |
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Nine Months Ended September 30, 2025: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues – depreciation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Segment gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Payroll and benefits excluded from cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other operating expenses |
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other expense (income) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Segment pre-tax income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| $ |
|
| $ |
|
|
| - |
|
| $ |
| |||
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Nine Months Ended September 30, 2024: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenue – depreciation |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Segment gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Payroll and benefits excluded from cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other expense (income) |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Segment pre-tax income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Capital expenditures |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 18 |
| Table of Contents |
The table below reconciles total segment pre-tax income for each period presented above to consolidated pre-tax income (in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| 2025 |
|
| 2024 |
|
| 2025 |
|
| 2024 |
| ||||
Total segment pre-tax income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Less: Unallocated SG&A, depreciation and other operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Plus: Unallocated interest income, net |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Less other expense (plus other income) |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Consolidated pre-tax income (loss) |
| $ | ( | ) |
| $ |
|
| $ |
|
| $ |
| |||
The table below presents segment total assets for September 30, 2025 and December 31, 2024 (in thousands):
|
| Procurement |
|
| Systems Integration |
|
| Facilities Management |
|
| Total Segments |
| ||||
Total Segment Assets at September 30, 2025 |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Total Segment Assets at December 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
The table below reconciles combined segment total assets for each period presented above to consolidated total assets (in thousands):
|
| September 30, 2025 (Unaudited) |
|
| December 31, 2024 |
| ||
Combined total assets included in segments |
| $ |
|
| $ |
| ||
Plus items not allocated to segments: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
|
|
|
|
| ||
Property and equipment, net |
|
|
|
|
|
| ||
Lease right-of-use asset |
|
|
|
|
|
| ||
Other assets |
|
|
|
|
|
| ||
Consolidated total assets |
| $ |
|
| $ |
| ||
| 19 |
| Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Result of Operations is intended to inform the reader about matters affecting the financial condition and results of operations of TSS, Inc. and its subsidiaries (collectively “we”, “us”, “our”, TSS or the Company). The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the condensed consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2024 included in our 2024 Annual Report on Form 10-K. This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties. Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be included in this report, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. The words “believe,” “expect,” “intend,” “plan,” “project,” “will” and similar phrases as they relate to us are intended to identify such forward-looking statements. In addition, please see the “Risk Factors” in Part 1, Item 1A of our 2024 Annual Report on Form 10-K for a discussion of items that may affect our future results.
Overview
TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex AI technologies, planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services have been enhanced to include integration of Artificial Intelligence (AI) enabled data center server racks. TSS was incorporated in Delaware in December 2004.
We deliver complex solutions to a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDCs), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more advanced computing and storage capacity. In recent years, these enterprises have shifted their investment priorities towards AI and accelerated computing infrastructure initiatives. Enterprise and data center operators are facing immense pressure to rapidly integrate and deploy the latest generative and inferencing AI equipment and GPUs (Graphics Processing Units) and will need to adapt these next-generation servers and custom rack-scale architectures to quickly and successfully compete in the market. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.
Over the last ten years, we have optimized our business by providing world-class integration services to our customer base. As computing technologies evolve and as we see new power and cooling technologies emerge, including direct liquid-cooled IT solutions and the rapid adoption of AI computing solutions, we will continue to adapt our systems integration business and capabilities to support these new products. We will also continue to offer expanded services to enable the integration, deployment, support, and maintenance of these new IT solutions. We compete in expanding market segments, often against larger competitors who have extensive resources. We rely on several large relationships and one US-based OEM (original equipment manufacturer) strategic customer to win contracts and to provide business to us under a Master Relationship Agreement. A material decline in volume from, or loss of this OEM customer would have a material effect on our results. Our operational focus is to ensure this does not occur.
Most of the components used in our systems integration business are consigned to us by our largest OEM customer or its end-user customers. Thus, our revenues reflect only the services we provide, and the consigned components are not reflected in our statement of operations or on our balance sheet. We also offer procurement services whereby we procure third-party hardware, software and services on their behalf. Our configuration and integration services businesses often integrate these components to deliver a complete system to our customers.
In October 2024, we signed a multi-year agreement with our largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. To support this level of production, and to be able to provide increased volumes over our prior facility, we moved our headquarters and production facility to a new location in May 2025. Through September 30, 2025, we have invested approximately $35.1 million in improvements to that leased facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled computer racks. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the capital expenditures, direct and indirect labor related to this activity, and all facility and related costs. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement with our customer provides reasonable assurance to us that absent our material breach of the agreement or our termination of the agreement, the revenues we earn from this arrangement will be sufficient to cover the aforementioned costs we expect to incur in fulfilling our obligations. Our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, the other party would be relieved of any further obligation. Funding sources for the build-out costs at the new facility include approximately $6.8 million to be contributed by our landlord, $25 million from a bank term loan, and cash on hand for the remainder of the costs. We expect to receive the $6.8 million from our landlord in the fourth quarter of 2025 and borrowed the final $5 million under the term loan in August 2025. Those funds reimbursed us for capital expenditures we had previously funded using cash on hand.
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The volume of our strategic procurement services grew substantially in the nine-month periods ended September 30, 2025 compared to the nine-month periods ended September 30, 2024. Customers value our ability to source disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported revenues will reflect only our fees earned in the transaction (“net deals”). If the procurement activities include integration services or other value-add work beyond just the procurement activity, the transaction is recorded at its gross value (“gross deals”), and revenue and costs are allocated to the procurement and systems integration segments based on the value created in each and the effort involved to fulfill the contracts.
Revenues consist of fees earned from planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenues from providing system configuration and integration services, and procurement services, to IT equipment vendors. We began integration services on AI racks in June 2024 and have continued with that activity throughout the current quarter. Currently we derive substantially all our revenue from the U.S. market.
We contract with our customers with various contract types: fixed-price service and maintenance contracts, time and material contracts, cost-plus-fee, guaranteed maximum price and fixed-price contracts. Cost-plus-fee and guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials and fixed-price arrangements, which generally generate higher profit margins, relative to their higher risk. Certain of our service and maintenance contracts provide comprehensive coverage of all the customers’ equipment (excluding IT equipment) at a facility during the contract period. Where customer requirements are clear, we prefer to enter comprehensive fixed-price arrangements or time-and-materials arrangements rather than cost-plus-fee and guaranteed maximum price contracts.
Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with the use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability. Occasionally, our revenues will reflect certain reimbursements received from customers for expanding our capacity, typically through capital expenditure or for adding headcount to support specific customer requests. In 2024, we invested approximately $1.7 million in our Round Rock facility to expand our capacity to integrate generative AI-enabled server racks, including both air cooled and direct-liquid cooled systems. One of our customers reimbursed us for the majority of those investments and we are amortizing that reimbursement into systems integration revenues over the expected useful life of three years.
Our maintenance and integration services traditionally earn higher margins and maintenance contracts typically renew annually, providing consistency and predictability of revenues. We focus our design and project management services on smaller jobs typically connected with addition or retrofit activities to obtain better margins and a more predictable pattern of earnings than are typically seen when such efforts are concentrated in fewer high-value contracts for the construction of new data centers, which would otherwise require greater levels of working capital and tend to yield lower margins. We have also focused on providing maintenance services for modular data center applications as this market has expanded. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding revenue streams such as procurement services to help drive volume through the integration facility.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2025
Unless otherwise noted, all comparisons in this section are between the three-month period ended September 30, 2025 (the “current quarter” or “this quarter”) and the three-month period ended September 30, 2024 (the “prior year quarter” or “this quarter last year”).
Revenues
Total revenues in the current quarter decreased 40% to $41.9 million. Procurement revenues decreased by $29.4 million (49%) in comparison to an unusually large volume of procurement activity in the prior year period and facilities management revenues decreased by $0.4 million (19%). These decreases were somewhat offset by an increase in systems integration revenues of $1.6 million (20%). Deferred revenues increased $8.7 million compared to the balance at December 31, 2024, for contracts and projects that were ongoing in the September 2025 quarter that are not expected to be completed until the fourth quarter of 2025 and to a smaller degree the first half of 2026. The deferred revenues expected in 2026 relate primarily to facilities management annual maintenance agreements.
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The $1.6 million (20%) increase in systems integration revenues was due primarily to the continued growth in integration of AI-enabled computer racks, which began with significant volume in June 2024, and an increase in certain fixed monthly fees as we became fully operational in our new Georgetown facility. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required under the terms of this agreement, our customer could terminate the agreement if we were to materially breach it, leaving us with the financial obligations of the facility and debt service regardless of whether we have revenue sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to our customer’s material breach of the agreement, they would be relieved of any further obligation. If the customer were to terminate the agreement for convenience, they would continue to be obligated to pay us for the monthly fixed charge, but would no longer have any minimum volume commitments, as discussed below.
To meet our customers’ evolving requirements for more powerful 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. In the current quarter, we were charged a flat fee of approximately $231,000 monthly, plus variable charges for actual power consumption. As we have recently further increased the available power to 15 megawatts, that flat monthly fee is scheduled to increase to $289,000. We made these additional capital and power investments during the current period with the expectation that they will help us generate greater revenues by increasing volume in future periods.
In addition to the fixed monthly fees to which we are entitled under that agreement, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business, our primary customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we do not meet the minimum weekly volume due to our production downtime or labor shortages compared to agreed-upon levels, we will reduce the fee, billing only for the quantity of racks we configured or could have configured given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. While any reduction in available staff such as seen in the current quarter reduces the revenues to which we are entitled under this agreement, we believe our long-term partnership with our customer is strengthened as we help them mitigate a portion of the costs for which they would otherwise be responsible. The periodic reduction of revenues has a muted impact on our overall results, as we also reduce our labor costs in line with the reduced revenues.
Our non-AI rack integration services, without such minimum commitments, may be impacted by periodic supply chain issues for certain components and lulls in demand. These supply chain disruptions periodically cause delays in the timing of systems integration revenue for us as we await delivery of required components, and our vendors and partners expect these supply-chain issues to continue for at least the next several quarters, though they appear to be improving in general. It is not yet known the extent to which tariffs currently threatened or imposed by the United States may or may not impact these supply chain issues.
The decrease in procurement revenues was driven primarily by a decrease in purchases from the federal government, when compared with the large volume in the prior year quarter. Declines were noted in both the gross and net procurement revenue deals as ongoing projects were shifted into the fourth quarter and the first half of 2026. 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. We cannot accurately predict the potential impact of the temporary federal government shutdown that began October 1, 2025 but we do anticipate some disruption in the timing of procurement orders from the federal government that require the interaction of individuals who have been temporarily furloughed.
Due to the lighter effort required to execute procurement transactions, the gross margins are less robust in that line of business. As a result, increases and decreases in that business have a smaller impact on our overall margins and profitability compared to increases in the facilities management or systems integration lines of business. The following table presents the results of our procurement activities, both in terms of the gross value of the transactions, regardless of whether they were recorded as gross deals or net deals, along with the recorded values, to aid in an analysis of the underlying economics (unaudited, in thousands, except percentages):
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|
| Three Months Ended September 30, 2025 |
|
| Three Months Ended September 30, 2024 |
|
| Decrease |
|
| Percentage Decrease |
| ||||
Recognized Values (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recognized value of all procurement deals |
| $ | 31,101 |
|
| $ | 60,484 |
|
| $ | 29,383 |
|
|
| 49% | |
Recognized cost of revenues |
|
| 28,530 |
|
|
| 56,766 |
|
|
| 28,236 |
|
|
| 50% | |
Gross profit |
|
| 2,571 |
|
|
| 3,718 |
|
|
| 1,147 |
|
|
| 30% | |
Gross margin based on recognized value of transactions |
|
| 8.3% |
|
| 6.1% |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Values (Non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross value of all procurement deals |
| $ | 48,070 |
|
| $ | 79,643 |
|
| $ | 31,573 |
|
|
| 40% | |
Cost of revenues |
|
| 45,499 |
|
|
| 75,925 |
|
|
| 30,426 |
|
|
| 40% | |
Gross profit |
|
| 2,571 |
|
|
| 3,718 |
|
|
| 1,147 |
|
|
| 30% | |
Gross margin based on gross value of transactions |
|
| 5.3% |
|
| 4.7% |
|
|
|
|
|
|
|
| ||
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 considered on a gross basis (unaudited, in thousands):
|
| Three Months Ended September 30, 2025 |
|
| Three Months Ended September 30, 2024 |
| ||
|
|
|
|
|
|
| ||
Recognized revenue of all procurement deals - GAAP |
| $ | 31,101 |
|
| $ | 60,484 |
|
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”) |
|
| 16,969 |
|
|
| 19,159 |
|
Gross value of revenues including netting (non-GAAP) |
| $ | 48,070 |
|
| $ | 79,643 |
|
|
|
|
|
|
|
|
|
|
Recognized cost of goods for all procurement deals - GAAP |
| $ | 28,530 |
|
| $ | 56,766 |
|
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”) |
|
| 16,969 |
|
|
| 19,159 |
|
Gross value of costs of goods including netting (non-GAAP) |
| $ | 45,499 |
|
| $ | 75,925 |
|
The gross value of all procurement transactions decreased 40% from the prior year quarter, from $80.0 million to $48.1 million in the current quarter. Gross profit recognized on all procurement transactions decreased 30% from $3.7 million to $2.6 million before interest charges.
Although the margins are less robust than our other lines of business, efforts required to support the procurement business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-selling opportunities for higher yielding integration services, so we continue to view this business as a growth vehicle.
Cost of Revenue and Gross Margins
Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expenses, equipment and other costs associated with our test and integration facilities, shipping costs, the costs of support functions such as purchasing, logistics and quality assurance, and depreciation of fixed assets directly related to our revenue-producing operations. Our consolidated gross margin remained consistent with the prior year quarter at 11%. Gross margins for the current quarter were 8% for the procurement business, 13% for the systems integration business, and 55% for the facilities management business. In the prior year quarter, gross margins were 6% for the procurement business, 45% for the systems integration business and 37% for the facilities management business.
| · | Procurement Segment: Calculated using the non-GAAP gross value of all transactions, procurement gross margins improved from 4.7% in the prior year quarter to 5.3% in the current quarter. |
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| · | Systems Integration Segment: The overall gross margin for systems integration declined to 13% in the current quarter. The overall decline was expected as the Georgetown, Texas facility went live in the second quarter of 2025 and a full quarter’s depreciation expense was recognized in the current period which is primarily attributable to the cost of revenues of systems integration. This led to an operations-related depreciation charge in the current period of $1.0 million which was not recognized in the prior year quarter. Excluding this amount, systems integration gross margins are 24% and segment gross profit is $2.2 million. The current period also includes certain uncapitalizable costs related to readying our new facility, which we would not expect to repeat in most future periods. When we started producing from, and started paying cash rent at, the new facility in May 2025, the fixed fee we earn from our customer under our multi-year AI rack integration contract increased by an amount intended to cover such incremental occupancy costs and other fixed costs. This segment continues to bear the majority of the facility costs for not only our new facility in Georgetown, Texas that came online in the current quarter, but also the costs related to our old facility in Round Rock, Texas. We have begun marketing the Round Rock facility for sublease and will continue to bear the cost of that facility until it is either subleased or re-deployed for other uses. As we have increased the available electrical power at the building, we also now incur a flat monthly fee of approximately $231,000 from the municipal power company, plus the cost of actual power consumption. As we have recently further increased the available power to 15 megawatts in preparation for supporting more powerful and a greater number of racks in future period, the fixed monthly power charge is scheduled to increase to $289,000 plus variable usage charges. While this investment in incremental power availability impacts gross margins and profitability in the short term, we anticipate increased revenues in future periods to more than offset the incremental power costs, beginning as early as the fourth quarter of 2025. |
|
|
|
| · | Facilities Management Segment: Gross margins in the facilities management segment remained robust and increased to 55% in the current quarter, up from 37% in the prior-year quarter. Compared to the prior-year quarter, maintenance revenues increased from $0.9 million to $1.0 million in the current quarter, and the prior year quarter included $1.0 million of deployment and other services compared to $0.6 million in the current quarter. Whereas maintenance revenues are more predictable, the timing of such discrete projects tends to fluctuate from quarter to quarter. In the remaining three months of 2025, we expect such discrete projects to exceed the level of discrete projects seen in the last three months of 2024. |
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.
A large portion of our revenue is derived from fixed price contracts. Under such contracts, we set the price of our services and assume the risk that the costs associated with our performance may be greater than we anticipated. Our profitability is therefore dependent upon our ability to accurately estimate the costs associated with our services. These costs may be affected by a variety of factors such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid on the contract and higher than expected costs of materials and labor. Certain agreements or projects could have lower margins than anticipated or losses if actual costs for contracts exceed our estimates, which could reduce our profitability and liquidity.
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. Our SG&A expenses increased by $1.4 million in the current quarter compared to the prior year quarter. Approximately half of the increase was due to an increase in non-cash equity-based compensation. The remainder increased primarily due to higher headcount and related compensation costs to support the growing scale of the organization combined with higher accruals for incentive compensation tied directly to the year-to-date improvements in sales and earnings. Also included in the current quarter are incremental costs for the 2025 annual audit and ongoing SOX 404(b) implementation.
Depreciation and Amortization outside cost of revenues
Depreciation and amortization not allocated to cost of revenues increased from $0.2 million in the prior year quarter to $0.3 million in the current quarter due to the general growth in the business.
Operating Income (Loss)
We recognized an operating loss of $0.9 million in the current quarter compared to operating income of $3.8 million in the prior year quarter. The majority of this loss is attributable to the incremental operations related depreciation and fixed electrical power costs in advance of the expected incremental revenues, as well as the timing of revenue projects and increased SG&A expenses as described above. As revenues continue to ramp at the new factory and SG&A costs moderate, we anticipate operating income in the final three months of 2025 will exceed the comparable period of 2024. If we are successful in subleasing our prior Round Rock, Texas facility, that will further enhance our operating income in future periods.
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Interest Expense and Interest Income
In the current quarter, we recorded interest expense of $1.0 million compared to $1.3 million in the prior year quarter. The decrease was due to the decrease in the gross value of procurement transactions and other revenues from our primary customer in the current quarter compared to the prior year quarter. The factoring charge we incur is based on the total gross value of transactions with our largest customer, including the gross value of procurement deals, whether we account for such deals as gross or net deals. During the current quarter we exercised the $5.0 million accordion feature on our existing term loan, increasing the outstanding debt on which interest accrues by that amount.
Due primarily to the higher average balance of cash on hand in the current quarter, interest income increased to $0.4 million compared to $0.2 million earned in the prior year quarter. The cash balance increased approximately $55.3 million as a result of our stock offering completed in August 2025, as described below in Liquidity and Capital Resources.
Net Income (Loss)
After a $0.1 million charge for income taxes, our net loss was $1.5 million, or $0.06 per diluted share in the current quarter, compared net income of $2.6 million, or $0.10 per diluted share in the prior year quarter. We anticipate returning to profitability in the fourth quarter of 2025 as we begin to realize incremental revenues stemming from our recent investments in our facility and access to additional electrical power.
Nine Months Ended September 30, 2025
Unless otherwise noted, all comparisons in this section are between the nine-month period ended September 30, 2025 (the “current year-to-date period” or “current period”) and the nine-month period ended September 30, 2024 (the “prior year-to-date period,” “prior year period” or “this period last year”).
Revenues
Total revenues in the current year-to-date period increased 88% to $184.8 million, driven primarily by significant growth in our two largest segments - procurement and systems integration. Procurement revenues increased by $77.3 million (100%) and systems integration revenues increased by $11.4 million (78%). These increases were somewhat offset by a $2.0 million (32%) decrease in revenue from the facilities management segment, primarily due to the timing of discrete projects in the facilities management business and a smaller decrease in ongoing maintenance revenues.
The $11.4 million (78%) increase in systems integration revenues was due primarily to the continued growth in integration of AI-enabled computer racks, which began with significant volume in June 2024.
The increase in procurement revenues was driven primarily by an increase in purchases from the federal government and certain large purchases from private companies, combined with a mix shift with a greater proportion of the revenues coming from gross deals, as opposed to net deals. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some variability of these revenues from quarter to quarter. We cannot accurately predict when government-related or other large procurement activity will occur.
Due to the lighter effort required to execute procurement transactions, the gross margins are less robust in that line of business. As a result, increases and decreases in that business have a smaller impact on our overall margins and profitability compared to increases in the facilities management or systems integration lines of business. The following table presents the results of our procurement activities, in terms of the gross value of the transactions, regardless of whether they were recorded as gross deals or net deals, along with the recorded values, to aid in an analysis of the underlying economics (unaudited, in thousands, except percentages):
|
| Nine Months Ended September 30, 2025 |
|
| Nine Months Ended September 30, 2024 |
|
| Increase |
|
| Percentage Increase |
| ||||
Recognized Values (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Recognized value of all procurement deals |
| $ | 154,280 |
|
| $ | 77,022 |
|
| $ | 77,258 |
|
|
| 100% | |
Recognized cost of revenues |
|
| 142,142 |
|
|
| 71,672 |
|
|
| 70,470 |
|
|
| 98% | |
Gross profit |
|
| 12,138 |
|
|
| 5,350 |
|
|
| 6,788 |
|
|
| 127% | |
Gross margin based on recognized value of transactions |
|
| 7.9% |
|
| 6.9% |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Values (Non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross value of all procurement deals |
| $ | 219,783 |
|
| $ | 120,587 |
|
| $ | 99,196 |
|
|
| 82% | |
Cost of revenues |
|
| 207,645 |
|
|
| 115,237 |
|
|
| 92,408 |
|
|
| 80% | |
Gross profit |
|
| 12,138 |
|
|
| 5,350 |
|
|
| 6,788 |
|
|
| 127% | |
Gross margin based on gross value of transactions |
|
| 5.5% |
|
| 4.4% |
|
|
|
|
|
|
|
| ||
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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 in 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 considered on a gross basis (unaudited, in thousands):
|
| Nine Months Ended September 30, 2025 |
|
| Nine Months Ended September 30, 2024 |
| ||
|
|
|
|
|
|
| ||
Recognized revenue of all procurement deals - GAAP |
| $ | 154,280 |
|
| $ | 77,022 |
|
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”) |
|
| 65,503 |
|
|
| 43,565 |
|
Gross value of revenues including netting (non-GAAP) |
| $ | 219,783 |
|
| $ | 120,587 |
|
|
|
|
|
|
|
|
|
|
Recognized cost of goods for all procurement deals - GAAP |
| $ | 142,142 |
|
| $ | 71,672 |
|
Materials costs incurred but excluded from both recorded revenues and costs (also known as “netting”) |
|
| 65,503 |
|
|
| 43,565 |
|
Gross value of costs of goods including netting (non-GAAP) |
| $ | 207,645 |
|
| $ | 115,237 |
|
The gross value of all procurement transactions increased 82% from the prior year-to-date period, from $120.6 million to $219.8 million in the current year-to-date period. The majority of the current period’s procurement transactions were gross deals, whereas a greater portion of the prior year period’s transactions were net deals, in which we record only our agent fee as revenues. As a result, the recorded revenue increased from $77.0 million in the prior year period to $154.3 million in the current year period. Gross profit recognized on all procurement transactions increased 127% from $5.4 million to $12.1 million before interest charges.
Although the margins are less robust than our other lines of business, efforts required to support the procurement business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-selling opportunities for higher yielding integration services, so we continue to view this business as a growth vehicle. As mentioned previously, the procurement business can fluctuate widely from quarter to quarter, and the recorded revenues can fluctuate even more widely if there is a substantial shift between gross and net deals, even if the underlying economics between the two are relatively similar.
Cost of Revenue and Gross Margins
Cost of revenue includes the cost of component parts for our products, labor costs expended in the production and delivery of our services, subcontractor and third-party expenses, equipment and other costs associated with our test and integration facilities, shipping costs, the costs of support functions such as purchasing, logistics and quality assurance, and depreciation of fixed assets directly related to our revenue-producing operations. Our consolidated gross margin decreased from 15% in the prior year-to-date period to 12% in the current year-to-date. Gross margins for the current year-to-date period were 8% for the procurement business, 24% for the systems integration business, and 57% for the facilities management business. In the prior year-to-date period, gross margins were 7% for the procurement business, 42% for the systems integration business and 57% for the facilities management business.
| · | Procurement Segment: Calculated using the non-GAAP gross value of all transactions, procurement gross margins improved from 4.4% in the prior year period to 5.5% in the current year-to-date period. The impact of this margin improvement on consolidated gross profit was further enhanced by the 82% increase in the volume of procurement activities, also calculated using the non-GAAP gross value of all procurement transactions. |
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| · | Systems Integration Segment: Further contributing to the growth in consolidated gross profits was the 4% increase in systems integration gross profit, to $6.4 million in the current year-to-date period. This was driven by the net effect of a 78% growth in systems integration segment revenues and a 133% growth in segment cost of revenues, from $8.5 million to $19.8 million. The current period increase in cost of revenues includes depreciation charges related to our Georgetown, Texas facility that began operations late in the second quarter of 2025 with full operations in the current quarter and is substantially attributable to the systems integration segment. The current period also includes certain uncapitalizable costs related to readying our new facility, which we would not expect to repeat in most future periods. Excluding the $1.6 million of depreciation charges related to the new facility, systems integration gross margins were 31% in the current year-to-date period compared to 42% in the prior year period, and gross profits improved from $6.4 million to $8.0 million in the current year-to-date period. When we started producing from, and started paying cash rent at, the new facility in May 2025, the fixed fee we earn from our customer under our multi-year AI rack integration contract increased by an amount intended to cover such incremental occupancy costs and other fixed costs. This segment continues to bear the majority of the facility costs for not only our new facility in Georgetown, Texas that came online in May 2025, but also the costs related to our old facility in Round Rock, Texas. We have begun marketing the Round Rock facility for sublease and will continue to bear the cost of that facility until it is either subleased or re-deployed for other uses. As we have increased the available electrical power at the building, we also now incur a flat monthly fee of approximately $231,000 from the municipal power company, plus the cost of actual power consumption. As we have recently further increased the available power to 15 megawatts in preparation for supporting more powerful and a greater number of racks in future period, the fixed monthly power charge is scheduled to increase to $289,000 plus variable usage charges. While this investment in incremental power availability impacts gross margins and profitability in the short term, we anticipate increased revenues in future periods to more than offset the incremental power costs, beginning as early as the fourth quarter of 2025. |
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| · | Facilities Management Segment: Gross margins in the facilities management segment remained consistent with the prior year-to-date period at 57%. With the cost of revenues improving from $2.8 million to $1.9 million, segment revenues decreased by a similar percentage to maintain the margin. Compared to the prior-year-to-date period, maintenance revenues decreased from $3.6 million to $2.9 million in the current year-to-date period, and the prior year period included $2.8 million of deployment and other discrete services compared to $1.5 million in the current year-to-date period. Whereas maintenance revenues are more predictable, the timing of such discrete projects tends to fluctuate from quarter to quarter. In the remaining three months of 2025, we expect such discrete projects to exceed the level of discrete projects seen in the last three months of 2024. |
Selling, General and Administrative (SG&A) Expenses
Our SG&A expenses increased by $5.9 million (65%) in the current year-to-date period. Of the total increase, $2.3 million is from non-cash equity-based compensation, with the remainder primarily from higher headcount and related compensation costs to support the growing scale of the organization combined with higher accruals for incentive compensation tied directly to the improvements in sales and earnings. We had further increased expenses related to non-capitalizable costs associated with the continued buildout of the Georgetown, Texas facility and increased utility expenses. Included in the current period are incremental costs for the 2025 annual audit and costs associated with our preparation of SOX 404(b) readiness.
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 period to $0.8 million in the current year-to-date period in line with the overall growth in the business.
Operating Income
Operating income was $5.4 million in the current year-to-date period compared to $5.7 million in the prior year-to-date period. This slight decline is due to the increased SG&A expenses (described above), mostly offset by the increase in gross profit.
Interest Expense and Interest Income
In the current year-to-date period, we recorded interest expense of $3.3 million compared to $2.0 million in the prior year-to-date period. The increase was due to the increase in the gross value of procurement transactions and other revenues from our primary customer in the current period compared to the prior year-to-date period, combined with the interest on our outstanding construction loan, whereas we had no outstanding debt in the prior year period. The factoring charge we incur is based on the total gross value of transactions with our largest customer, including the gross value of procurement deals whether we account for such deals as gross or net deals.
Due primarily to the higher average balance of cash on hand in the current year-to-date period, interest income increased to $1.0 million compared to $0.4 million earned in the prior year-to-date period. The cash balance increased approximately $55.3 million as a result of our stock offering completed in August 2025, as described below in Liquidity and Capital Resources.
Net Income
After a $0.1 million increase in income taxes, our current year-to-date net income was $3.0 million, or $0.11 per diluted share, compared to a net income of $4.1 million, or $0.16 per diluted share in the prior year-to-date period.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity at September 30, 2025 are our cash and cash equivalents on hand, vendor trade-credit, projected cash flows from operating activities and approximately $6.8 million of tenant improvement funds we expect to collect from our landlord in the fourth quarter of 2025 as all prerequisite conditions have been met and approved by the landlord. In the past two years, we have also received certain reimbursements from our largest customer to help us expand our capacity to serve them and could receive similar reimbursements in future periods if they ask us to expand to even greater capacity.
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As discussed above, we signed a multi-year agreement in 2024 to integrate an expected minimum weekly volume of AI-enabled computer racks for several years. Due to the increasing power and cooling demands expected in upcoming generations of those racks, we leased a new facility in Georgetown, Texas which can provide sufficient power for the foreseeable future and began operations in that facility in May 2025. The new facility is almost 213,000 square feet compared to the 105,000 square foot leased facility in which we previously operated. Through September 30, 2025, we have invested approximately $35.1 million in that facility, funded with a $20 million construction loan and cash on hand. In the current year-to-date period, we borrowed the remaining $11.3 million available on the construction loan beyond the $8.7 million that was outstanding at the beginning of the year. On July 5, 2025, the outstanding $20.0 million balance converted to a fully amortizing term loan with a maturity date of January 5, 2030. The monthly payment will vary somewhat as the loan bears a floating interest rate, with monthly principal and interest payments of approximately $437,000 beginning in August 2025. In September 2025 we exercised the accordion feature of that loan, borrowing an additional $5.0 million, bringing the total gross value borrowed to $25.0 million, better aligning our long-term facility with long-term financing. The accordion feature has all the same terms and conditions as the existing term loan, and the two loans are coterminous. We anticipate receiving funds from our customer sufficient to offset the debt service for the full term of this debt and the majority of the costs to operate the new facility as most of that facility will be used in that activity. If we are unable to sublease our prior 105,000 square foot facility, we may incur the costs of two facilities for a period of time.
The majority of the Company’s receivables are from a single customer with 80-day payment terms. We generally factor our receivables from that customer through a bank factor, so that we are paid within 2-3 days of invoicing rather than needing to wait the full term to receive funds. We believe this is an efficient program, as we estimate the effective annualized interest rate to utilize that program is less than the rate at which we could borrow funds. We hold excess funds in an interest-bearing account so that we can earn some interest income on the funds we receive immediately from the factoring program but do not have to pay to our vendors for 30-45 days on typical payment terms.
As of September 30, 2025 and December 31, 2024, we had cash, cash equivalents and restricted cash of $75.7 million and $23.2 million, respectively. At both dates, $5.0 million of that amount was held in a money market account as collateral against our outstanding bank debt and therefore is not immediately accessible other than to use for repayment of the debt.
Significant sources and uses of cash
Operating activities:
Cash provided by operating activities was $19.1 million in the current year-to-date period, compared to $36.9 million in the prior year-to-date period. This change in cash provided by operating activities was primarily attributable to the significant increase in accounts payable in the prior period of $37.6 compared to the decrease in accounts payable in the current year-to-date period of $4.8 million offset by an $8.2 million higher increase in deferred revenues in the current period and an $8.1 million greater increase in the right-of-use asset period-over-period. In the current year-to-date period, we also decreased our held inventory by $6.4 million, whereas we invested $2.6 million in inventory growth in the prior year-to-date period. Changes in our receivables, inventory, and accounts payable during the current period are attributable primarily to the timing of procurement transactions, with some of the accounts payable decrease related to construction costs recognized in the prior period coming due. We have been able to structure our procurement activities in such a way as to minimize their overall impact on our liquidity by using trade creditors as the primary means to finance these activities. However, due to timing it is possible to see fluctuations on a quarterly or annual basis for procurement contracts in progress at the end of a particular reporting period. We believe that we will have adequate trade credit available to us to continue financing our procurement activities as we grow this business during 2025 and beyond.
Investing activities:
We invested $32.7 million of cash in the nine months ended September 30, 2025 primarily in the buildout of our new leased integration facility and headquarters. These costs are largely for enhancements to our electrical and cooling systems to support our growth in AI-enabled rack integration. This compares to only $1.8 million invested in capital assets in the prior year-to-date period.
Financing activities:
Net cash inflows from financing activities were $66.2 million compared to a $0.6 million outflow in the prior year period. In the current period, loan proceeds to fund our construction provided $15.8 million of cash, offset by $4.9 million used to repurchase treasury stock from employees, and debt principal repayments of $0.6 million. In August 2025, we also sold 3,450,000 shares of our common stock, netting cash inflows of $55.3 million after deducting transaction costs of $0.4 million, significantly increasing funds available to invest in future expansion and growth opportunities.
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To minimize dilution to our shareholders, we generally allow employees to “net settle” upon the vesting of restricted stock and upon stock option exercises, allowing them to forfeit a portion of the shares sufficient to cover their tax obligation, if applicable, and the option exercise price, and we then use the Company’s cash to pay the employee’s taxes. None of the share repurchases were open-market transactions and there is no approved share buyback program in place other than allowing employees to net settle.
Future uses of cash
Our business plans and our assumptions around the adequacy of our liquidity are based on estimates regarding future revenues and costs and our ability to secure sources of funding when needed. However, our revenues may not meet our expectations and our costs may exceed our estimates. Further, our estimates may change, and future events or developments may affect our estimates. Any of these factors may change our expectations of cash usage during 2025 and beyond or significantly affect our level of liquidity, which could require us to take other measures to raise funds or reduce our operating costs to continue operating. Any action to reduce operating costs may negatively affect our range of products and services that we offer or our ability to deliver such products and services, which could materially affect our financial results depending on the level of cost reductions taken.
Our primary liquidity and capital requirements are to fund working capital from current operations and to fund the repurchase of treasury shares from employees upon option exercises or vesting of restricted stock to allow them to cover their tax liabilities. Our primary sources of funds to meet our liquidity and capital requirements include cash on hand and funds generated from operations including the funds from our customer financing program. We believe that if future results do not meet expectations, we can implement reductions in selling, general and administrative expenses to better achieve profitability and therefore improve cash flows, or that we could take further steps such as the issuance of new equity or debt. However, the timing and effect of these steps may not completely alleviate a material effect on liquidity. We may also require additional capital if we seek to introduce a new line of business or if we seek to acquire additional businesses, further expand our facility, or operate both facilities.
Off-Balance Sheet Arrangements
As of September 30, 2025 and December 31, 2024, we had no off-balance sheet arrangements.
Critical Accounting Policies and Pronouncements
There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2024 on our consolidated financial statements and disclosures. See also Item 1. Financial Statements Note 1 – Significant Accounting Policies regarding Recent Accounting Pronouncements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our debt, with an outstanding principal balance of $24.4 million at September 30, 2025, bears a variable interest rate that fluctuates with prevailing 1-month SOFR (Secured Overnight Financing Rate). We cannot accurately predict whether effective rates will increase or decrease, or by what degree. Hypothetically, if annual rates were to average twenty-five basis points (0.0025%) higher or lower than current rates over the next twelve months, we would expect our annual interest expense to increase or decrease, respectively, by approximately $61,000. In the most recent quarter ended September 30, 2025, this exposure has increased as the outstanding principal on the debt has increased from $20.0 million to $24.4 million.
The rates we pay to factor the gross value of the majority of our accounts receivable are also based on prevailing SOFR and increases or decreases in prevailing SOFR will increase or decrease the related factoring costs, recorded as interest expense. Assuming a hypothetical gross value of accounts factored of $200 million and a 78-day effective period (80-day terms on our accounts receivable in which our customer pays the bank factor minus the two days in which our bank factor typically pays us), a hypothetical twenty-five basis point increase or decrease in prevailing SOFR would result in an increase or decrease of annual interest expense, respectively, of approximately $107,000.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act of 1934, as amended (“the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
Due to its inherent limitations, any system of internal control over financial reporting, no matter how well defined, may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2025, our disclosure controls and procedures, as defined in Rule 13a-15(e), were ineffective at the reasonable assurance level as we have not yet fully remediated and validated the effective remediation of a material weakness in internal control over financial reporting first identified in the Annual Report on Form 10-K for the year ended December 31, 2024 as described below.
Material Weakness
In the Annual Report on Form 10-K for the year ended December 31, 2024, we identified a material weakness in our internal control over financial reporting relating to the ineffective design of certain management review controls across a portion of 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 during that period did not identify, prevent or detect these risks of material misstatements, we determined the existence of a material weakness in our internal control over financial reporting. We believe the root causes of the control deficiencies were primarily several manual processes in our closing process, combined with challenges in properly segregating duties due to the relatively small size of our accounting department and additional controls needed.
To formally remediate controls, companies must not only update or put into place controls such that they are designed and operate effectively, but such effective operation must be evaluated and verified over a period of time before we determine the control deficiencies that led to the material weakness have formally been remediated. In order to remediate the control deficiencies leading to the material weakness, we have made certain improvements to our internal controls in the first nine months of 2025, plan to make further enhancements, have enhanced management review of certain areas, and have engaged external experts to assist us in more formally designing, documenting and testing our controls. We have also committed to more fully documenting the performance of the controls themselves so that they not only operate effectively but so that there is also sufficient audit evidence that may be reviewed, so that others may verify the effective operation of the controls.
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weaknesses are remediated as soon as possible.
Notwithstanding the material weakness described above, management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three-month and nine-month periods ended September 30, 2025 present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2025, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting except as described above. As described above, we have made certain improvements and plan further improvements to our internal controls over financial reporting in periods after the period covered by this quarterly report on Form 10-Q, but those controls have not yet been fully evaluated to determine that they have effectively remediated the material weakness identified above.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material litigation in any court, and we are not aware of any contemplated proceeding by any governmental authority against us. From time to time, we are involved in various legal matters and proceedings concerning matters arising in the ordinary course of business such as employment-related matters. We believe that any potential liability arising out of these matters and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. 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, 2024, which could adversely affect our business, financial conditions and future results. Other than the risk factor set forth below, there have been no material changes from the risk factors discussed in our Annual Report.
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, the U.S. federal government shutdown 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth information about our purchases of outstanding shares of our common stock during the quarter ended September 30, 2025:
Monthly Period During the Quarter Ended September 30, 2025 |
| Total Shares Purchased |
|
| Average Price paid per Share |
|
| Total Shares Purchased as Part of Publicly Announced Plans |
|
| Approximate Dollar Amount of Shares Yet To Be Purchased Under Plans |
| ||||
July 1, 2025 – July 31, 2025 |
|
| 31,578 |
|
| $ | 26.70 |
|
|
| - |
|
|
| - |
|
August 1, 2025 – August 31, 2025 |
|
| 8,018 |
|
| $ | 16.42 |
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|
|
|
|
|
|
|
|
September 1, 2025 – September 30, 2025 |
|
| - |
|
| $ | - |
|
|
| - |
|
|
| - |
|
Total |
|
| 39,596 |
|
| $ | 24.62 |
|
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|
|
|
|
|
|
|
(a) All of these shares were acquired from associates to satisfy tax withholding requirements upon the vesting of restricted stock or accepted as the exercise price for associates exercising stock options. None were open market trades.
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Item 5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended September 30, 2025, none of our directors or officers (as defined in Rule 16a-1 under the Exchange Act)
On September 12, 2025, Todd Marrott, Chief Operating Officer of the Company, adopted a Rule 10b5-1 trading arrangement for the sale of the Company’s common stock, subject to certain conditions, for a total of up to 80,089 shares. The trading arrangement was entered into during an open trading period and Mr. Marrott represented to us that he intended for it to satisfy the requirements for the affirmative defense of Rule 10b5-1(c) of the Exchange Act. The arrangement’s scheduled expiration date is October 1, 2026.
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Item 6. Exhibits.
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101.INS * | Inline XBRL Instance Document |
101.SCH * | Inline XBRL Taxonomy Extension Schema |
101.CAL * | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF * | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB * | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TSS, INC. |
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Date: November 13, 2025 | By: | /s/ Daniel M. Chism |
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| Daniel M. Chism |
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| Chief Financial Officer |
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| (Principal Financial Officer) |
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| 34 |
EXHIBIT 31.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002
I, Darryll E. Dewan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TSS, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| November 13, 2025 | By: | /s/ Darryll E. Dewan |
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| Darryll E. Dewan |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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EXHIBIT 31.2
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002
I, Daniel M. Chism, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TSS, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or person performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| November 13, 2025 | By: | /s/ Daniel M. Chism |
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| Daniel M. Chism |
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| Chief Financial Officer (Principal Financial Officer) |
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EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2025 (the “Report”) of TSS, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Darryll E. Dewan, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: November 13, 2025 | By: | /s/ Darryll E. Dewan |
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| Darryll E. Dewan |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2025 (the “Report”) of TSS, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel M. Chism, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: November 13, 2025 | By: | /s/ Daniel M. Chism |
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| Daniel M. Chism |
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| Chief Financial Officer |
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| (Principal Financial Officer) |