Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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.

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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.
	·	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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