SEC Form 10-K filed by TSS Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2025

OR 

For the transition period from     to     

Commission file number: 001-33627

Registrant’s telephone number, including area code

(512)-310-1000

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act: None 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐   No ☒

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 preceding 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. Yes ☒   No ☐

Indicate by check mark whether the 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). Yes ☒   No ☐

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.:

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. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

The aggregate market value of common stock held by non-affiliates of the Registrant, computed by reference to the price at which the common stock was last sold on June 30, 2025, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported on the Nasdaq, was approximately $585 million. Shares of the registrant’s common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

Number of shares of Common Stock outstanding as of March 11, 2026: 27,773,594.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Definitive Proxy Statement, relating to our 2026 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the 2025 fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.

TSS, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2025

“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 Annual Report on Form 10-K (the “Annual 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 Annual Report.

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.

PART I.

Item 1. Business 

Company Overview

TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex Artificial Intelligence (AI) technologies, planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services have been enhanced to include integration of AI enabled data center server racks. TSS was incorporated in Delaware in December 2004. 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 secondary integration facility in our Round Rock facility for approximately one additional quarter before all operations were migrated to our new facility in Georgetown.

We deliver complex solutions to a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDCs), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more advanced computing and storage capacity. In recent years, these enterprises have shifted their investment priorities towards AI and accelerated computing infrastructure initiatives. Enterprise and data center operators are facing immense pressure to rapidly integrate and deploy the latest generative, inferencing and agentic AI equipment and GPUs (Graphics Processing Units) and will need to adapt these next-generation servers and custom rack-scale architectures to quickly and successfully compete in the market. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.

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 some cases, in the performance of procurement services, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party but have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction. These procurement services allow us to develop relationships with new hardware, software and professional service providers and allow us to generate higher profits on integration projects by broadening our revenue and customer base.

Recent Developments

In October 2024, we signed a long-term agreement with our largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. To support this level of production and to be able to provide increased volumes over our existing facility, we moved our headquarters and production facility to a new location in 2025 and completed capital expenditures of approximately $40 million for improvements to that facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled (“DLC”) computer racks. In December 2025, we signed an amendment to the long-term agreement whereby both parties agreed to update the pricing in the agreement to account for increased power demands and capital expenditures beyond those contemplated in the original agreement, update the pricing to reflect current rack configurations, and to extend the term of the agreement by an additional two years, with automatic one-year renewals if neither party terminates the agreement at least 180 days prior to that date. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement provides reasonable assurance to us that, absent our material breach of the agreement, the fees we earn from this arrangement will consistently be sufficient to cover projected fixed and variable costs directly related to the performance of our obligations under the agreement. The agreement may also be terminated for convenience by either party with 180 days’ written notice. If the other party terminates the agreement for convenience, it would no longer be committed to minimum volumes, however it would remain obligated to pay us amounts that we believe would be sufficient to cover the related facility costs and debt service costs related to capital expenditures incurred to support our obligations under this agreement, or to directly assume the responsibility for such items.

The volume of our strategic procurement services grew substantially during 2024 and 2025 compared to prior years. 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 or cost involved to fulfill the contracts.

Service Offerings

We have developed a unique set of solution offerings to provide a range of services that enable our customers and partners to efficiently plan, develop, build, deploy, and maintain their IT hardware and software solutions. These solutions begin with strategies for the care of information technology assets that are housed in the facility or MDCs including power, cooling and heat management, as well as disaster recovery backup systems. Our operating expenses are not exclusively aligned to each service offering, as shared resources such as sales, marketing, and general and administrative expenses support all services. Our solutions involve many aspects of the life cycle of both traditional and MDCs and their related assets which are described in more detail below.

Systems Integration Services:

To assist our customers with IT equipment deployment in their data centers, we provide what we call "systems integration” services. We provide integrated technology services and software tools designed to accelerate the assembly and delivery of complex information technology solutions. These services include custom configuration of a broad scope of information technology products including client products, enterprise products, clusters, and modular containers. The integration of this equipment at both a rack-level or facility or MDC level is performed to our customers’ specifications and test criteria and may include imaging of software onto the hardware as well. We are generally not responsible for the performance of the related IT equipment in the field. While we have the ability to do onsite rack integration and occasionally do so, we believe one of our competitive advantages is doing rack integration in our own centralized rack integration facility, where we have greater scalability and our staff can specialize in individual parts of the integration process rather than needing to be a generalist in all phases of rack integration as is generally needed for onsite rack integration performed in clients’ data centers. This approach also allows for greater quality control as it is performed and supervised in our ISO-certified facility. We also provide warehousing of high-value equipment such as servers, switches, and other information technology hardware that are generally provided on a consignment basis to us by our OEM and end-user customers.

We also provide second-touch configuration services for our OEM and end-user customers, such as adding software, hardware, or other features to end-user devices, bundling such devices with peripherals, pre-loading customer-determined application software, tagging, asset capture, and other fulfillment services. Our services include solutions for edge devices, and client and infrastructure technologies. Many, but not all of these configuration services originate from our strategic procurement activities and are delivered as a holistic solution to customers seeking bundled services for procurement and configuration.

Facilities Management Services:

While we do not manufacture the individual components that go into modular data centers (‘MDC’), we ensure all systems and equipment are correctly installed, integrate and test the computer racks in the MDC and test the entire MDC before deploying it to a customer site. Our strategy includes increasing the number of customers and MDCs under contract so that we can increase the amount of recurring revenues from ongoing design, maintenance, and support contracts. Our mission-critical facilities experience and our skilled personnel position us as trusted advisors to our customers and allow us to work on new opportunities as our customers grow or as their facilities mature and as partners introduce us to new client opportunities. We also intend to increase our efforts at establishing direct selling and business relationships within the market. In our history, we have integrated over 500 MDCs and currently continue to maintain over 100 of such MDCs. We anticipate enterprises may increase their evaluation of MDCs as they seek ways to efficiently deploy AI-enabled servers in their own environments without requiring the expense of building or retro-fitting data centers to accommodate AI racks. We have disaggregated the Facilities Management Services into two separate service offerings:

1-Equipment sales, deployment and other services:

In connection with the deployment of a solution within a customer’s existing data center, MDC or related equipment requirements, our capabilities include project management, value engineering and design management, bid negotiation support, subcontractor pre-qualification and selection, long-lead equipment procurement, issuance of equipment and construction contracts, and refinement and management of project budgets and schedules. Our project managers mobilize the required expertise for the project, utilizing project superintendents, quality control and safety professionals, as well as qualified subcontractors and support personnel. Project managers supervise work by project team members, including subcontracted parties, and all aspects of the following: architecture and construction, electric power systems, heat rejection and cooling, energy management, and controls, cooling tower systems, security systems, voice, data and network cabling, fire and life safety systems, and process piping and plumbing systems. The project manager remains responsible for managing all aspects of the project until project completion and customer delivery.

In addition, this installation portion of a project has the largest number of outside influences that can impact project goals and objectives, such as weather, non-performance of subcontractors, equipment deliveries, unexpected project changes from the owner and influence from local authorities and utility providers. Therefore, management experience, skill, and mission focus are critical during the project installation period.

2 - Maintenance and management:

We provide a comprehensive maintenance and service offering designed to ensure that the multiple systems critical to sustaining online applications in enterprise data centers and MDCs remain operational and functional. Typical facilities management services include overall management of the post-construction facility maintenance program and on-site staffing of technical engineering positions (e.g., electricians, HVAC mechanics, control technicians, and voice/data technicians). Some data centers are constructed in a modular format, whereby information technology, power, cooling, air filtration, uninterruptible power supplies and other related assets are deployed in pre-integrated solutions. MDCs may have lower overall cost of delivery, lower energy consumption, and shorter deployment schedules compared to traditional data centers. Our on-site maintenance services provide additional project revenue for us and position us for involvement in any new facility planning, design, and construction initiatives that the customer undertakes.

In addition, we provide 24x7 network operations support by remotely monitoring our data center service contract customers’ facilities for systems operations and emergency events that could lead to outages. Temperature levels, humidity, electrical connectivity, power usage, and fire alarm conditions are among the items monitored. The system maintains all site documentation for repairs and maintenance performed on each critical piece of equipment covered under our services. Such information is useful to our customers in assessing operational efficiency and causes of failure and enables them to make critical decisions on repair or replacement strategies based on the operating history of the monitored systems.

Our facilities maintenance service contracts can be tailored to customer requirements and typically span one to three years in duration, renewable annually thereafter, with cancellation clauses for nonperformance and are typically billed annually in advance. Our service contracts take different forms including fixed-price equipment maintenance with an optional comprehensive warranty to fix failures in key components such as uninterruptible power supplies or batteries, ticket-based service provided at contracted rates in a master service agreement, comprehensive facility services agreements that include on-site staffing, scheduled equipment maintenance and nontechnical facility services, and direct job-specific contracts for additional moves, additions, refreshes, refurbishments and change work within a facility.

As compute density increases and data centers evolve into the use of modular form factors, we found that we could leverage our facilities' maintenance experience and infrastructure by offering maintenance services for modules being deployed into new data centers. Our design services continue to evolve to support changing data center requirements including installation and maintenance of systems deployed on the edge. Ultimately, we started working with IT vendors to help them in the design and integration of their IT equipment into MDCs, which typically leads to ongoing maintenance contracts as these modular systems deploy.

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 or delivery of the completed product depending on the performance obligation. 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”). Thus, the gross margin percentage for this business can be significantly different, even if the gross profit dollars are the same, depending on this mix of gross and net deals. This, in turn, can have a material impact on the gross margin percentage for the consolidated company, particularly in periods in which we experience a large change in volume of procurement transactions in relation to the volume of the remainder of our business.

Customers

Our customers include IT OEM equipment, technology and service companies and private-sector businesses that in some cases are the end users of the facility, or in other cases are providing a facility to a government or commercial end user. The majority of our sales are currently made to or through strategic alignment with a global Fortune 100 information technology company with a significant presence near our headquarters and integration facility. Through them, we provide facility management services to other major technology, software, banking and cloud service providers. The majority of our procurement services and systems integration activities are likewise delivered in conjunction with or for this same large OEM.

Sales and Marketing

A key part of our selling strategy is entering into master service agreements with multiple partners and co-selling our range of services to our partners’ end-user customers, leveraging their customer relationships and broadening the scope of potential customers for us. Our go-to-market approach relies primarily on business generated by or through a global Fortune 100 OEM customer with whom we have strategically aligned ourselves. This approach relies on expertise in information technology hardware systems, energy consumption, real estate matters, and facilities planning and operation from this primary demand source. This marketing approach allows the end–user customer to contract for comprehensive facilities services or to contract separately for each project phase such as integration or fulfillment services.

We continue to expand on our go-to-market strategy to also capitalize on our investment in direct selling personnel and leveraging our OEM partner’s capabilities at the same time. Our ability to be involved in sales engagements earlier in the cycle and with end-users allows us to positively impact demand and provide greater visibility into the integration schedules and future pipeline. This impacts our ability to better manage personnel schedules and ultimately optimize our production capacity. We also seek to enhance our name recognition using improved web marketing, trade shows, technical seminars, direct mailings, and social media.

Our headcount in sales and marketing has been very selective and targeted to align the skill sets with our evolving service offerings, leverage partner relationships and increase the consultative capability of our sales organization.

Maintaining key alliances and creating new partnerships is an important part of our sales development and growth plan. These alliances reside with various information technology consulting firms, specialty mission-critical engineering firms, application service providers, and internet service providers. Key alliance opportunities also reside in other firms within the market sector such as equipment manufacturers, product suppliers, property management firms, developers, information technology system integrators, and firmware providers. We are focused on expanding our strategic alliances with information technology corporations to provide engineering, design, construction management services, systems integration, modular solutions, and facility management services. As we expand our configuration services business, we expect this will help us establish alliances with new hardware and software providers who operate in the IT infrastructure market.

Competition

The mission-critical information technology solutions market is large, fragmented, and highly competitive. We compete for contracts based on the strength of our customer relationships, successful past performance, significant technical expertise, specialized knowledge, and broad service offerings. Our strength lies in our ability to deliver quality solutions on time and with high quality at a competitive price. These solutions can be complex or simple. We have gained market traction by providing complex AI solutions utilizing GPU and advanced thermal management technology and our largest customer highly values our flexibility, partnership and ability to execute on our commitments. We often compete against channel resellers and divisions of large information technology service and equipment providers. In some cases, because of diverse requirements, we collaborate with these and other competitors for projects. We respect competition in the information technology services sector, and we embrace what we need to do to compete and win to continue to increase in the future.

Strategy

Our goal is to profitably grow our existing businesses and to identify expanded service offerings to further our value-add to our customers as we become a recognized leader in the life-cycle management of complex IT solutions. At a high level, the strategy we intend to use to accomplish this goal includes:

Employees

On December 31, 2025, we had 286 full-time employees plus approximately 64 temporary workers utilized primarily in our rack integration services. Our future success will depend on our continued ability to attract, retain, and motivate qualified personnel. We are not a party to any collective bargaining agreement, and we have not experienced any strikes or work stoppages. We consider our relationship with our employees to be very satisfactory.

Available Information

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements relating to our annual stockholders’ meeting with the Securities and Exchange Commission ("SEC”). Copies of these filings, including amendments to such filings are available, free of charge, on our website, www.tssiusa.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website is not and should not be deemed to be a part of this Annual Report or a part of any other report or filing with the SEC. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Item 1A. RISK FACTORS

Our business involves a number of risks, some of which are beyond our control. The risks and uncertainties described below are not the only ones we face. Such factors could have a significant impact on our business, operating results and financial condition. We believe the most significant of these risks and uncertainties are as follows:

Our revenues are highly concentrated with a single OEM customer, and our business, financial condition and results of operations would be materially and adversely affected if we are unable to maintain or expand that relationship or successfully diversify our customer base.

We derive a substantial majority of our revenues from a single OEM customer. Revenues from this customer comprised approximately 99%, 99% and 96% of our total revenues for the years ended December 31, 2025, 2024 and 2023, respectively. Although we provide services across multiple business units and divisions of this OEM and have entered into a long-term AI rack integration agreement that includes minimum monthly payments, our overall financial performance remains highly dependent on the continuation and scope of this relationship.

Any reduction, delay or termination of purchases by this customer, whether due to changes in its business strategy, demand for its products, supply chain constraints, regulatory developments, pricing pressure, internal reorganization, competitive dynamics, financial condition or otherwise, could result in a material decline in our revenues, profitability and cash flows. Because our cost structure includes fixed facility costs, labor and debt service obligations associated with our integration facility, a reduction in volume from this customer could have a disproportionate negative effect on our operating results.

In addition, while we are actively pursuing diversification of our customer base through expanded procurement services, AI rack integration for additional OEMs, value-added resellers, systems integrators and MDC providers, there can be no assurance that these efforts will be successful or that new customers will generate revenues at levels sufficient to offset any decline from our primary OEM customer. The timing, scale and profitability of diversification initiatives are uncertain and may require additional investment in personnel, facilities, working capital or infrastructure before generating meaningful returns.

Given the magnitude of our customer concentration, even a relatively modest change in purchasing patterns by our primary OEM customer could materially and adversely affect our business, financial condition and results of operations.

A material breach of our long-term rack integration agreement, or our choice to terminate the agreement for any reason other than the other party’s material breach of the agreement, could significantly reduce certain minimum payments from our primary OEM partner.

We have incurred notable financial commitments related to a new lease on a larger integration facility and the debt to finance capital expenditures in that facility needed to fulfill our obligations under the long-term AI rack integration agreement with our largest OEM partner. Our long-term agreement, and subsequent amendment, calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required, per the terms of the agreement, our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, they would be relieved of any further obligation. Either of these events would represent a material adverse effect on our results of operations, financial condition and cash flows.

Future power demands of AI-enabled computer racks is unknown and our ability to continue to earn revenues from AI rack integration services is highly dependent on our access to an acceptable amount of electrical power and related computer cooling capabilities.

A significant driver of the growth in our revenue and earnings is our AI rack integration services. Technology for AI computers continues to advance, and currently each new generation typically consumes more electrical power than preceding generations, which in turn requires even more electrical power and additional cooling equipment. We moved to a new building in 2025, primarily to secure access to the electrical power needed to perform our AI rack integration services. While we believe we relocated to a location where we can source additional power if and when needed due to the city building an electrical power substation very near our leased property, we have no guarantee that such additional power will be available or be allocated to us beyond the 15 Megawatts to which the city has contractually committed itself to provide currently. The city has indicated they will be able to continue to increase the available power over time. If new generations of AI computer racks continue to consume more power than preceding generations, our failure to obtain access to additional power in a reasonable time frame, or the inability to secure additional chillers or other cooling capacity to cool the related racks would have a material, negative impact on our ability to meet our customers’ needs. Future increases in power requirements could also require us to make incremental capital investments in our facility to continue to scale with the power and cooling requirements.

Our revenues and profitability could be materially and negatively affected by U.S. imposed tariffs.

The United States has recently begun to implement material tariffs on some of the countries with which it has a great deal of international trade and has threatened tariffs on a variety of other countries. Many of the servers we integrate, other goods on which we provide configuration services and some products we procure for our customers have recently been made or assembled in countries subject to such tariffs. This introduces additional doubt as to whether our customers will be able to pass such costs onto their customers and as a result whether they can continue to sell such products at an acceptable profit. This, in turn, could materially and negatively affect our revenues, cash flows and financial position. Even if tariffs are ultimately lifted, temporary implementation of tariffs introduces doubt in the mind of buyers and causes disruptions in the supply chain that could introduce weeks or even months of delays in the ability to source parts and therefore similar delays in our ability to operate at full capacity, negatively impacting our earnings and financial position, and possibly even leading to cancelation of customer orders based on expected delays.

A prolonged U.S. federal government shutdown could materially and adversely affect our business and operations

As a significant portion of our procurement business is related to U.S. federal government purchases, a prolonged temporary shutdown of the U.S. federal government could materially impact our revenues and cash flows from our procurement segment. A prolonged shutdown, including the furlough of U.S. government employees, may disrupt our ability to complete existing procurement orders and obtain future business. In addition, periodic U.S. federal government shutdowns may adversely affect the broader U.S. economy, investor confidence, and capital markets. Such conditions could negatively impact the liquidity or trading volume of our securities, which in turn could have a material adverse effect on our business, results of operations, and stock price. 

Supply chain challenges could negatively affect our integration business by slowing the supply of parts needed to perform integration services, requiring us to hold greater quantities of inventory for longer periods and/or delaying completion of services for our customers.

Supply chain challenges on global production and distribution could cause shortages of components needed to complete integration and procurement services, delaying our ability to recognize revenue for these projects and negatively impacting our profitability and cash flows. In addition to delaying our services, this could also result in us having to hold onto greater quantities of customer inventory for longer periods while we wait for the delayed components to be delivered. Due to our fixed storage capacity, holding customer-owned inventory for longer periods could negatively impact our ability to perform other services and add cost and risk, including custodial risk, into our integration business. The supply chain disruptions could also directly impact vendors and other third parties from whom we procure goods and services for our procurement business, causing delays in completing procurement services for our customers. This has the potential to materially harm our operating results by delaying recognition of revenue. This can also harm our liquidity position if we are forced to pay vendors for products and services before we have the ability to invoice and receive payment from our customers, which could also prevent us from performing additional procurement services for our customers or cause other liquidity concerns. Although our long-term AI rack integration agreement signed in 2024 and subsequently amended in 2025 passes much of the risk for supply chain disruptions to our customer through the use of minimum quantity commitments as it relates to AI rack integration, we are still exposed to these issues in our procurement business, non-AI rack integration business and configuration services.

We may be unable to hire and retain sufficiently qualified personnel, and the loss of any of our key executive officers may adversely affect our business.

We believe that our future success will depend in large part on our continued ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional, and technical personnel. Our business involves the development of tailored solutions for customers, a process that relies heavily upon the expertise and services of employees. Accordingly, our employees are one of our most valuable resources. Competition for skilled personnel is intense in our industry. Recruiting and training these personnel requires substantial resources particularly when seeking qualified staff in remote locations where a number of our customers operate their data centers. Our failure to attract and retain qualified personnel could increase the cost of fulfilling our contractual obligations, reduce our ability to efficiently satisfy our customers’ needs, limit our ability to win new business and constrain our future growth.

Changes in labor market conditions are causing increases in our labor costs, and if we are unable to adequately recover these costs from our customers, our business will be negatively impacted.

At times, we experience higher levels of attrition, increasing compensation costs, and more intense competition for talent. We believe that our future success will be dependent upon retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur. As a company with a small workforce, we are particularly susceptible to negative impacts if critical and experienced personnel leave. As a result, we continue to invest in Human Resources automation tools that help us manage through many of these challenges. Hiring and retaining qualified executives and other employees is therefore critical to our business. From 2023 to 2025, we had a number of planned changes to our executive leadership team, and we experienced increased wage pressure and challenges in hiring other staff in the Austin, Texas market. We have had to pay higher wages, and elected to improve our health and welfare plans to attract new employees and retain our existing employees. If our total compensation programs, employment benefits, and overall workplace culture are not viewed as competitive, our ability to attract, retain and motivate employees could be compromised. To the extent we experience significant attrition or the loss of critical employees and are unable to replace employees in a timely manner, we could experience a loss of critical skills and reduced employee morale, potentially resulting in business disruptions or increased expenses to address any disruptions. To the extent that we are unable to promptly pass higher labor costs on to our customers, our business will be negatively impacted. Our inability to attract, retain and motivate employees or manage a succession of key roles may inhibit our ability to maintain or expand our business operations.

The ongoing refinement and integration of our ERP system could disrupt operations and adversely affect our internal control over financial reporting.

Our ERP platform is central to managing inventory, tracking AI rack integration workflows, processing procurement transactions and generating financial reports. We continue to enhance the system to support higher transaction volumes, new service offerings and expanded operational complexity. Modifications, upgrades, system integrations or changes in business processes may introduce errors, system downtime, or data inconsistencies.

If our ERP system fails to operate as intended, we could experience delays in fulfilling customer orders, inaccuracies in inventory balances, or delays in billing and collections. In addition, weaknesses in system configuration, user access management, change management controls or data interfaces could impair the effectiveness of our disclosure controls and internal control over financial reporting.

As our business grows and our financial reporting requirements increase, including potential auditor attestation of ICFR, deficiencies in our ERP control environment could result in increased audit scrutiny, remediation costs, reporting delays or identification of control deficiencies. Any material disruption or control failure associated with our ERP system could materially and adversely affect our business, financial condition and results of operations.

Our procurement business requires significant working capital and depends on vendor trade credit and a single factoring arrangement; any disruption, modification or timing mismatch could materially affect our liquidity and operating results.

Our procurement activities require us, at times, to purchase substantial quantities of hardware, software and related services from third-party vendors in advance of receiving payment for those goods. The volume and timing of procurement transactions may fluctuate significantly based on customer demand and project schedules, which can materially increase our working capital requirements during periods of elevated activity.

We finance these activities primarily through vendor trade credit and a receivables factoring arrangement. Our liquidity therefore depends on the continued availability and consistent operation of that factoring structure, as well as stable vendor payment terms. If vendor credit terms are shortened, credit limits are reduced, advance rates or related fees are modified, eligibility requirements change, or the factoring arrangement is restricted or terminated, our short-term cash requirements could increase materially.

In addition, if shipment timing, customer acceptance procedures or billing cycles are delayed, we may be required to satisfy vendor obligations prior to receiving corresponding funds, creating temporary liquidity pressure. If we are unable to maintain sufficient trade credit or continued access to our factoring arrangement on acceptable terms, we may need to deploy cash reserves, obtain alternative financing or limit procurement volumes, any of which could materially and adversely affect our revenues, liquidity and results of operations.

As the age of modular data centers increases and customers look to shut or replace such units, our recurring maintenance revenues could be negatively impacted, and this could adversely affect our operating results.

Modular data centers (MDCs) typically have a lifespan of 6-10 years unless they are updated with new IT equipment. As they near the end of their useful life, customers can either perform maintenance to extend the MDCs' lifespan or terminate maintenance contracts for those MDCs. If customers terminate their annual maintenance contracts, it could negatively impact our maintenance revenues and profitability unless they replace the units with new MDCs. While our history suggests that customers may replace MDCs with new modules subject to annual maintenance contracts, the time period between these two events could result in a decrease in our maintenance and overall revenue in our facilities management business. In 2024 and 2025, we have seen a general decrease in the number of MDCs for which we provide annual maintenance contracts, as more MDCs are being retired compared to the number of new MDCs being deployed. We anticipate a reversal of that trend, but there can be no assurance of such reversal, or the time frame in which it might occur.

We operate in a highly competitive industry, which could reduce our growth opportunities, revenue and operating results.

The mission-critical information technology industry in which we operate is highly competitive and continues to become more competitive. We often compete against divisions of large information technology consulting and integration companies, including several large domestic companies that may have financial, technical and marketing resources that exceed our own. These larger competitors have an infrastructure and support greater than ours. Accordingly, we continue to experience some price pressure as some companies are willing to take on projects at lower margins. Our competitors may develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position. Our size occasionally prevents us from bidding on larger, more profitable projects, which reduces our growth opportunities. Although our customers currently outsource a significant portion of these services to us and our competitors, we can offer no assurance that our existing or prospective customers will continue to outsource specialty contracting services to us in the future.

Most of our contracts may be canceled on short notice, so our revenue and potential profits are not guaranteed.

Other than our long-term AI rack integration agreement which was signed in 2024 and amended and extended in 2025, most of our contracts are cancelable on short notice by the customer either at its convenience or upon our default. If one of our customers terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profit from that contract. If one of our customers terminates the contract due to our default, we could be liable for excess costs incurred by the customer in re-procuring services from another source, as well as other costs. Many of our contracts, including our service agreements, are periodically open to bid. We may not be the successful bidder on our existing contracts that are re-bid. We also provide a portion of our services on a non-recurring, project-by-project basis. We could experience a reduction in our revenue, profitability and liquidity if our customers cancel a significant number of contracts, if we fail to win a significant number of our existing contracts upon re-bid, or if we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects. In addition, we provide services under certain master service agreements. If these agreements are terminated, we would be unable to provide ongoing services to those customers.

We submit change orders to our customers for work we perform beyond the scope of some of our contracts. If our customers do not approve these change orders, the results of operations could be adversely impacted.

We typically submit change orders under some of our contracts for payment of work performed beyond the initial contractual requirements. The applicable customers may not approve or may contest these change orders, and we cannot provide assurance that these claims will be approved in whole, in part or at all. If these claims are not approved, our results of operations could be adversely impacted.

We may not accurately estimate the costs associated with services provided under fixed-price contracts, which could impair our financial performance.

The majority of our revenue is derived from fixed-price contracts. Under these 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.

We warranty customer equipment against failure in some of our fixed price contracts, and a major equipment failure could have a material impact on our financial performance.

Under some of our maintenance contracts, we provide limited warranties for the continued performance of equipment, including batteries and actuators used in MDCs. We estimate the anticipated failure or replacement rate of this equipment, but if a customer location experienced a failure rate of equipment greater than we anticipated, we would incur higher equipment replacement costs and incur a loss on that maintenance contract, which could have a material negative impact on our profitability and liquidity.

We may choose, or be required, to pay our subcontractors even if our customers do not pay or delay paying us for the related services.

We use subcontractors to perform some portions of our services and to manage workflow. In some cases, we pay our subcontractors before our customers pay us for the related services. If we choose, or are required, to pay our subcontractors for work performed for customers who fail to pay us, or delay paying us for the related work, we could experience a decrease in profitability and liquidity.

The industries we serve have experienced and may continue to experience rapid technological, structural and competitive changes that could reduce the need for our services and adversely affect our revenues.

The mission-critical information technology industry is characterized by rapid technological change, intense competition and changing consumer and data center needs. We generate a significant portion of our revenues from customers in the mission-critical information technology industry. New technologies, or upgrades to existing technologies by customers, could reduce the need for our services and adversely affect our revenues and profitability. Improvements in existing technology may allow companies to improve their networks without physically upgrading them. Reduced demand for our services or the loss of a significant customer or end-user could adversely affect our results of operations, cash flows and liquidity.

If we are unable to engage appropriate subcontractors or if our subcontractors fail to perform their contractual obligations, our performance as a prime contractor and ability to obtain future business could be materially and adversely impacted.

Our contract performance may involve subcontracts with other companies upon which we rely to perform all or a portion of the work we are obliged to deliver to our customers. Our inability to find and engage appropriate subcontractors or a failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely affect our ability to perform our obligations as a prime contractor.

In extreme cases, a subcontractor’s performance deficiency could result in the customer terminating the contract with us due to our default. A default termination could expose us to liability for excess costs of procurement by the customer and have a material adverse effect on our ability to compete for future contracts and task orders.

A cybersecurity incident, including one affecting our third-party service providers, could materially disrupt our operations, expose us to liability and subject us to mandatory public disclosure under SEC rules.

Our operations depend on the availability, integrity and security of our information technology systems and those of our third-party vendors. We face ongoing threats from ransomware, data exfiltration, business email compromise, insider threats and other sophisticated attacks. Because we integrate high-value AI-enabled hardware and maintain operational data relating to customers, we may be an attractive target for threat actors.

A significant cybersecurity incident could disrupt warehouse and integration operations, delay customer deliveries, impair billing and collections, or result in unauthorized access to confidential or proprietary information. Such an incident could expose us to contractual claims, indemnification obligations, litigation, regulatory inquiries, remediation costs and reputational harm. Disruptions affecting our ERP or financial systems could also impair our ability to timely process transactions or prepare financial reports.

In addition, under SEC rules, a cybersecurity incident determined to be material would require prompt public disclosure, which could increase volatility in the trading price of our common stock and heighten scrutiny from customers, regulators and investors. Although we maintain cybersecurity risk management processes, no system can eliminate all risks, and any material cybersecurity incident could materially and adversely affect our business, financial condition and results of operations.

We have identified a material weakness in our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information.

In connection with the preparation of our financial statements for the year ended December 31, 2024, and as discussed in Item 9A – “Controls and Procedures,” we identified a material weakness in our controls relating to the ineffective design of certain management review controls across the Company’s financial statements, leading to adjustments that were and could have been material to our 2024 consolidated financial statements. Due to the fact that our internal controls over financial reporting did not identify, prevent or detect these risks of material misstatements, we determined this indicated a material weakness in our internal controls over financial reporting at that date. We believe the root causes of the control deficiencies are primarily a number of manual processes in our closing process, combined with challenges in properly segregating duties due to the relatively small size of our accounting department, additional controls needed, and user access for certain information technology systems that support the Company’s financial reporting process.

While we have enacted a number of control enhancements to remediate this material weakness, we have not yet fully remediated all deficiencies that led to the conclusion that we had a material weakness. As a result, we continue to conclude that this material weakness remains at December 31, 2025.

Furthermore, we cannot provide any assurances that we have identified all material weaknesses. In the future, it is possible that additional material weaknesses or significant deficiencies may be identified that we may be unable to remediate timely. If we fail to maintain effective systems, controls and procedures, including disclosure controls and procedures and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations and prevent fraud could be adversely impacted. While we have plans to remediate this material weakness, failure to achieve this goal effectively or in a timely manner could adversely impact our ability to maintain an effective internal control environment and our financial results.

Item 1B. Unresolved Staff Comments. 

None.

Item 1C. Cybersecurity 

Item 2. Properties. 

We lease a 212,793 square foot light industrial space in Georgetown, Texas, which serves as our corporate headquarters and integration facility. We began partial operations at this facility in May 2025 and fully migrated the remainder of our operations to this facility in August 2025. The initial lease term runs through May 2035 and we have multiple renewal options on the lease.

We lease a 96,766 square foot warehouse and office space in Round Rock, Texas, with a lease term expiring March 31, 2029. We have no renewal options on this lease. This facility previously served as our headquarters and integration facility prior to our move to Georgetown, Texas in 2025, and is now idle.  

We are currently marketing it for sublease, while simultaneously proposing additional work to utilize that space. We believe that our current facilities are adequate for our operations and additional or replacement facilities would be available if necessary.

Item 3. 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 4. Mine Safety Disclosures 

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  

Market Information

Since November 2024, our common stock has been traded on the Nasdaq Capital Market under the symbol "TSSI.” Prior to that, our stock was traded on the OTCQB tier of the OTC Markets Group, Inc., a centralized quotation service that collects and publishes market-maker quotes for over-the-counter securities in real time.

Holders

As of March 11, 2026, there were 69 stockholders of record of our common stock, although we believe there is a far larger number of beneficial owners of our common stock. 

Dividend Policy

We did not pay dividends on our outstanding stock during the years ended December 31, 2025, 2024, and 2023. We currently intend to retain all future earnings, if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deems relevant, including, among others, our results of operations, financial condition and cash requirements, business prospects and the terms of our credit facilities and other financing arrangements.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to shares of our common stock that were acquired by the Company during the fourth quarter of 2025:

Stock Performance Graph

This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, or the SEC, for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act.

The following graph compares the cumulative total return on the Company’s Common Stock for the period from December 31, 2020 through December 31, 2025 with the total return over the same period on the Russell 2000 Index (“RUT”) and the Nasdaq US Small Cap Technology Index (“NASDAQNQUSS10”). The graph assumes that $100 was invested on December 31, 2020 in Common Stock of the Company and in each of the foregoing indices and assumes reinvestment of dividends, if any. The comparisons in the graph are based on historical data.

Item 6. [RESERVED]  

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains statements that are forward-looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of, among other reasons, factors discussed in Item 1A – Risk Factors and elsewhere in this Annual Report. The commentary should be read in conjunction with the consolidated financial statements and related notes and other statistical information included in this Annual Report.

In this section, we discuss the results of our operations for the year ended December 31, 2025 compared to the year ended December 31, 2024. For a discussion of the year ended December 31, 2024 compared to the year ended December 31, 2023, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024.

Overview

TSS, Inc. ("TSS”, the "Company”, "we”, "us” or "our”) provides a comprehensive suite of services for the integration of complex Artificial Intelligence (AI) technologies, planning, design, deployment, maintenance and refresh of end-user and enterprise systems, including the mission-critical facilities in which they are housed. We provide a single source solution for enabling technologies in data centers, operations centers, network facilities, server rooms, security operations centers, communications facilities and the infrastructure systems that are critical to their function. Our services consist of technology consulting, design and engineering, project management, systems integration, systems installation, facilities management and IT procurement services. Beginning in 2024, our systems integration services have been enhanced to include integration of AI enabled data center server racks. TSS was incorporated in Delaware in December 2004.

We deliver complex solutions to a broad range of enterprise customers who utilize our services to deploy solutions in their own data centers, in modular data centers (MDCs), in colocation facilities or at the edge of the network. This market remains highly competitive and is subject to constant evolution as new computing technologies or applications drive continued demand for more advanced computing and storage capacity. In recent years, these enterprises have shifted their investment priorities towards AI and accelerated computing infrastructure initiatives. Enterprise and data center operators are facing immense pressure to rapidly integrate and deploy the latest generative, inferencing and agentic AI equipment and GPUs (Graphics Processing Units) and will need to adapt these next-generation servers and custom rack-scale architectures to quickly and successfully compete in the market. Ensuring adequate power and thermal management systems are implemented to support these new technologies while meeting increasingly stringent sustainability requirements is critical to a successful deployment. TSS exists to assist these operators in achieving these benefits over the life cycle of their IT investments.

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 long-term agreement with our largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. To support this level of production, and to be able to provide increased volumes over our prior facility, we moved our headquarters and production facility to a new location in May 2025. Through December 31, 2025, we have invested approximately $40 million in improvements to that leased facility, primarily to significantly increase the available electrical power and related cooling capabilities for both air-cooled and direct liquid cooled computer racks. This is greater than the $20 million - $25 million we initially expected to invest in the facility, primarily in response to requests from our primary customer to increase the available power and cooling capabilities beyond the initial scope. We are financially responsible for all fixed and variable costs related to this activity, including debt service requirements related to the capital expenditures, direct and indirect labor related to this activity, and all facility and related costs. In December 2025, we signed an amendment to the long-term agreement whereby both parties agreed to extend the term of the agreement for an additional two years beyond its original multi-year term, with automatic one-year renewals if not earlier terminated, and to provide pricing updates to account for increased power consumption and capital expenditures. While there may be some variability in the number of racks built in any given period, we believe the structure of the agreement with our customer provides reasonable assurance to us that absent our material breach of the agreement or our termination of the agreement, the revenues we earn from this arrangement will be sufficient to cover the aforementioned costs we expect to incur in fulfilling our obligations. Our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the lease and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to the other party’s material breach of the agreement, the other party would be relieved of any further obligation. Funding sources for the build-out costs at the new facility include approximately $6.8 million contributed by our landlord, $25 million from two related bank term loans, and cash on hand. We borrowed the final $5 million under the term loan in the third quarter of 2025 and we received the $6.8 million of tenant improvement funds from our landlord in the fourth quarter of 2025. Those funds reimbursed us for capital expenditures we had previously funded using cash on hand. We paid down $5 million of our outstanding debt using previously restricted cash which was released in December 2025 pursuant to our debt agreement.

The volume of our strategic procurement services grew substantially in the year ended December 31, 2025 compared to the prior year. Customers value our ability to source disparate hardware, software and services and provide a single-source solution for their IT needs. In some cases, we merely act as agents in these transactions, and so the reported revenues will reflect only our fees earned in the transaction (“net deals”). If the procurement activities include integration services or other value-add work beyond just the procurement activity, the 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.

Our total revenues in 2025 were $245.7 million, a $97.6 million or 66% increase from our 2024 revenues of $148.1 million, with the majority of this increase coming from $80.0 million (68%) growth in our procurement business and $17.7 million (78%) growth in our systems integration businesses. The systems integration business growth was driven primarily by the significant increase in rack integration of AI-enabled computer racks. These increases were partially offset by a $0.1 million (1%) decrease in revenue from the facilities management segment, primarily due to a decrease in maintenance revenues largely offset by an increase in discrete projects.

The following table presents our revenues disaggregated by reportable segment and by product or service type (in ’000’s):

The following table presents our revenues disaggregated by timing of revenue recognition (in ’000’s)

The following table presents our revenues disaggregated by contract type (in ’000’s)

Our gross profits increased by $10.0 million or 45% compared to 2024, mainly due to the higher volumes of activity in our procurement and systems integration businesses, including our AI rack integration activity, combined with margin expansion on our procurement activities. In addition to earning revenue for completing AI rack integrations, our long-term agreement includes weekly volume commitments as well as certain fixed fees for multiple years, which we believe will be sufficient to cover our fixed and variable costs incurred in fulfilling our obligations under the agreement. Specifically, we believe the fees received under this agreement, and subsequent amendment, will be sufficient to cover all of our direct labor, labor training, power consumption and other variable costs, as well as indirect labor, rent and related facility costs for the portion of our factory allocated to this activity, debt service for the assets added to support this business, and other smaller fixed costs that we will incur to perform our obligations under this agreement. If we experience periodic lulls in demand or if our customer has extended periods of inability to secure parts, we have agreed to seek opportunities to scale back a portion of our direct labor and temporary employees used in this activity, primarily in positions that can be refilled and retrained fairly quickly as demand or supply chain issues are resolved, and to in turn reduce the variable fees charged to our customer under this agreement. We believe this structure demonstrates our desire to help control the customer’s costs while protecting our financial results by reducing our fee to them only if our own internal labor costs also are reduced. Our blended gross profit margin as a percentage of sales decreased to 13% in 2025 from 15% in 2024. The primary cause of the decrease in blended gross profit margin percentage was the increase in volume of our procurement business as a proportion of our total revenue, where we generally earn much lower margins on product purchase/resell services than we do with our traditional maintenance and integration services. While gross profits in the systems integration business grew by 30%, the margins realized in that line of business decreased from 42% in 2024 to 31% in 2025. Margins in the facilities management segment remained robust and relatively constant at 60% in 2025 compared to 62% in 2024.

The 66% growth in total revenues, combined with the slight decrease in blended gross margins, translated to a 45% increase in gross profit from 2024 to 2025. Net of an increase in operating costs, primarily administrative costs, operating income increased by $0.6 million, or 10%. Due to our continued positive earnings, we determined it was more likely than not that we would be able to utilize our deferred tax assets and released almost all of the previously recognized valuation allowance. This release drove the $7.6 million income tax benefit, and in combination with our increased operating income and $1.1 million increase in interest income, contributed to a total growth in net income in 2025 of 153%. Net income for the year ended December 31, 2025 was $15.1 million compared to $6.0 million net income in the prior year. In prior periods, we reported our bank factoring fees in the “interest expense” caption on our income statements. In the current period, we began reporting bank factoring fees separately as a deduction when computing operating income, and interest expense now reflects only the interest expense related to our bank debt.

We ended 2025 with $85.5 million of cash on hand, an increase of $62.3 million from the balance at the end of 2024. This increase was driven by the $34.9 million of cash flow from operations during 2025, $9.8 million of net financing obtained from debt proceeds less payments made during the year, and $55.3 million from our public offering of common stock completed in August 2025. The increase in cash flow from operations was tied to the $15.1 million of net income, combined with timing differences on receipts from customers net of payments to vendors specifically in relation to an elevated level of procurement activity ongoing at year-end. These inflows were somewhat offset by $32.7 million cash used in investing related primarily to the build-out of our new integration facility, and $4.9 million of cash used to repurchase shares from employees as a means for them to satisfy tax withholding requirements or pay the exercise price upon the vesting of restricted stock and exercise of stock options.

Critical Accounting Policies and Estimates

We consider an accounting policy to be critical if:

Management has reviewed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed these disclosures. In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above. Changes in these and other items could still have a material impact upon our financial statements.

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 standalone selling prices.

Maintenance services

We generate maintenance services revenues from fees that provide our customers with as-needed maintenance and repair services on MDCs during the contract term. Our contract terms typically are one year in duration, are billed annually in advance, and are non-cancellable. As a result, we record deferred revenue (a contract liability) and recognize revenue from these services 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 long-term agreement signed in 2024 and subsequent amendment signed in December 2025 and effective November 1, 2025, we also recognize revenue monthly at contractually based amounts for certain billable fixed and facility costs and trained staffing levels to support the weekly quantity of AI-enabled racks, with staffing fees reduced for any under-staffing. The fee for staffing is based on defined services as transferred to the customer and is not variable consideration because the customer’s usage is known weekly and is not contingent on the occurrence of any future events or subject to any estimation.

The amendment to this agreement signed in December 2025 adjusted pricing primarily to compensate us for the incremental capital investments and power costs that we incurred to meet the customer’s needs and extended the agreement by an additional two years past what was already a multi-year term, and automatic one year renewals after that unless either party elects to terminate it at the end of the initial term.

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 30-80 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’ credit worthiness. As of December 31, 2025, we had no allowance for credit losses, compared to $7,000 recorded as of December 31, 2024. In 2025, we were successful in collecting the $7,000 that was reserved in 2024, resulting in the removal of that reserve.

Equipment 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.

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 MDCs; and other fixed-price services including repair, design and project management services. 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. In an effort to further diversify our revenue streams, we offered the service of project-managing the movement of data center equipment in portions of 2024 and 2025. During 2025, we ceased offering this service as it proved to not meet our profit expectations.

Strategic 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 or delivery of the completed product depending on the performance obligation. 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 and optimize our working capital, we generally factor the procurement services receivables utilizing a program that we estimate has an effective annualized interest rate below the rate at which we could borrow funds. Regardless of whether the transaction is recorded as a gross deal or a net deal, the factoring fees we are charged are based on the gross value of each transaction.

 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.

Remaining Performance Obligations and Deferred Revenue

Remaining performance obligations include deferred revenue and amounts we expect to receive for goods and services that have not yet been delivered or provided under existing, non-cancellable contracts. For contracts that have an original duration of one year or less, we have elected the practical expedient applicable to such contracts and we do not disclose the transaction price for remaining performance obligations at the end of each reporting period and when we expect to recognize this revenue. As of December 31, 2025, total remaining performance obligations and deferred revenue, were $129 million. The remaining performance obligations include:

Contract liabilities consisting of deferred revenues were $3,384,000 on December 31, 2024, and $3,370,000 on December 31, 2023. Substantially all of the recorded deferred revenues at December 31, 2024 and December 31, 2023 had been earned and recorded as revenues in the one year periods following those dates.

Depreciation of production-related fixed assets

Depreciation of fixed assets that are related specifically to revenue-generating activities is reported as a separate component of cost of revenues. As these amounts were immaterial in prior years, these costs were excluded from cost of revenues and included in Depreciation and Amortization in prior year presentations.

Intangible Assets

We recorded goodwill and intangible assets with definite lives, including customer relationships and acquired software, in conjunction with the acquisition of various businesses. Intangible assets with definite lives are amortized based on their estimated economic lives. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and it is not amortized. The recorded goodwill is allocated to the reporting unit to which the underlying transaction relates. 

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 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 have elected to use December 31 as our annual assessment date. As circumstances change that could affect the recoverability of the carrying amount of goodwill during an interim period, we will evaluate our goodwill for impairment. The Company performed a qualitative analysis of our goodwill on December 31, 2025, and 2024 and concluded there was no impairment. The valuation results indicated that the fair value of our reporting units was greater than the carrying value for each of our reporting units. Thus, we concluded that there was no goodwill impairment on December 31, 2025, or 2024. On December 31, 2025, and 2024, the carrying value of goodwill was $0.8 million.

In any period with a reported value of intangible assets with definite lives, our policy is to review those intangible assets for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.  Our recorded intangible assets with definite lives were fully amortized at December 31, 2025 and 2024; accordingly, no such impairment review was necessary during 2024 or 2025. 

Allowance for Credit Losses

We estimate an allowance for 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 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.

Stock Based Compensation

We account for stock-based compensation using a fair-value based recognition method. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized ratably over the requisite service period of the award. For grants with performance requirements, expense recognition begins only once the achievement of the performance criteria is deemed probable. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information that can change significantly over time. A small change in estimates can have a relatively large change in the estimated valuation.

We use the Black-Scholes option valuation model to value employee stock option awards that are not performance-based awards. We estimate stock price volatility based upon our historical volatility. Estimated option life and forfeiture rate assumptions are derived from historical data. For restricted stock awards, we use the quoted price of our common stock on the grant date as the fair value of the award. For stock-based compensation awards with graded vesting, we recognize compensation expense using the straight-line amortization method. For performance-based stock awards, if applicable, we may use third-party valuation specialists and a Monte-Carlo simulation model to ascertain the fair value of the award at grant date.

Inventory Valuation

Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis and specific identification. The cost basis of our inventory is reduced for any products that are considered excess or obsolete based on assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse effect on the results of our operations.

Income Taxes

Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets that are not more likely than not to be realized. We monitor the realizability of our deferred tax assets taking into account all relevant factors at each reporting period. In completing our assessment of realizability of our deferred tax assets, we consider our history of income (loss) measured at pre-tax income (loss) adjusted for permanent book-tax differences on a jurisdictional basis, volatility in actual earnings, excess tax benefits related to stock-based compensation in recent prior years, and impacts of the timing of reversal of existing temporary differences. We also rely on our assessment of the Company’s projected future results of business operations, including uncertainty in future operating results relative to historical results, volatility in the market price of our common stock and its performance over time, variable macroeconomic conditions impacting our ability to forecast future taxable income, and changes in business that may affect the existence and magnitude of future taxable income. Our valuation allowance assessment is based on our best estimate of future results considering all available information.

We are required to file income tax returns in the U.S. which requires us to interpret the applicable tax laws and regulations. Such returns are subject to audit by the various federal and state taxing authorities, who may disagree with respect to our tax positions. We believe that our consideration is adequate for all open audit years based on our assessment of many factors, including past experience and interpretations of tax law. We review and update our estimates in light of changing facts and circumstances, such as the closing of a tax audit, the lapse of a statute of limitations or a change in estimate. To the extent that the final tax outcome of these matters differs from our expectations, such differences may impact income tax expense in the period in which such determination is made.

Results of Operations

In this section, we discuss the results of our operations for the year ended December 31, 2025 (the “current year” or “2025”) compared to the year ended December 31, 2024 (the “prior year” or “2024”). For a discussion of the year ended December 31, 2024 compared to the year ended December 31, 2023, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024.

Revenue

Revenues consist of fees earned from the planning, design and project management for mission-critical facilities and information infrastructures, as well as fees earned from providing maintenance services for these facilities. We also earn revenues from providing system configuration and integration services, as well as procurement services, to IT equipment vendors. We began integration services on AI racks in June 2024 and have continued that activity to date. Currently we derive substantially all our revenue from the U.S. market.

We contract with our customers with various contract types: service and maintenance, time and material, and guaranteed maximum price contracts, all of which are fixed-price exclusive of time and material contracts. Guaranteed maximum price contracts are typically lower risk arrangements and thus yield lower profit margins than time-and-materials 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.

Most of our revenue is generated based on services provided either by our employees or subcontractors. To a lesser degree, the revenue we earn includes reimbursable travel and other costs to support the project. Since we earn higher profits from the labor services that our employees provide compared with use of subcontracted labor and other reimbursable costs, we seek to optimize our labor content on the contracts we are awarded to maximize our profitability. Occasionally, our revenues will reflect certain reimbursements received from customers for expanding our capacity, typically through capital expenditures, or for adding headcount to support specific customer requests. In 2024, we invested approximately $1.7 million in our Round Rock facility to expand our capacity to integrate generative AI-enabled server racks, including both air-cooled and direct-liquid cooled systems. One of our customers reimbursed us for the majority of those investments. Prior to December 2025, we were amortizing that reimbursement into service integration revenues over the expected useful life of three years; the same period over which we were depreciating the related fixed assets. As the production of AI racks has now fully moved to our Georgetown facility and we no longer expect to utilize the assets installed in our Round Rock facility, we accelerated the revenue recognition and depreciation of those assets in the fourth quarter of 2025. The acceleration of recognition of the reimbursement amounted to approximately $0.8 million which is included in the 2025 systems integration revenues; the acceleration of depreciation of these assets amounted to $0.7 million, and is reported on the face of our income statement as “loss on sale or disposal of assets.” Our Round Rock facility is currently idle, as we seek additional business to utilize the space or to sublease the space if not used in our operations.

Our maintenance and integration services traditionally earn higher margins and maintenance contracts typically renew annually, providing consistency and predictability of revenues. We focus our design and project management services on smaller jobs typically connected with addition or retrofit activities to obtain better margins and a more predictable pattern of earnings than are typically seen when such efforts are concentrated in fewer high-value contracts for the construction of new data centers, which would otherwise require greater levels of working capital and tend to yield lower margins. We have also focused on providing maintenance services for MDC applications as this market has expanded. We continue to focus on increasing our systems integration revenues through more consistent revenue streams that will better utilize our assets in that business, and through adding revenue streams such as procurement services to help drive volume through the integration facility.

Total revenues in 2025 increased 66% to $245.7 million. Procurement revenues increased by $80.0 million (68%), and systems integration revenues increased by $17.7 million (78%), while facilities management revenues decreased by $0.1 million (1%) from 2024.

The $17.7 million (78%) increase in systems integration revenues was due primarily to the growth in integration of AI-enabled computer racks, which began with significant volume in June 2024 and continued at similar volumes throughout the remainder of 2025. In December 2025, we amended the long-term agreement signed in 2024, to continue integrating AI-enabled racks at similar volumes, and expect systems integration revenues to remain significantly above the historical trend, or consistent with the past year for the foreseeable future. This agreement calls for certain minimum monthly payments to us, which we believe will be sufficient to cover the majority of the costs for the facility and debt service payments tied to the build-out of that factory for which we are responsible. While those payments are required under the terms of this agreement, our customer could terminate the agreement if we were to materially breach the agreement, leaving us with the financial obligations of the facility and debt service regardless of whether we had revenues sufficient to cover those costs. Likewise, if we were to terminate the agreement other than due to our customer’s material breach of the agreement, they would be relieved of any further obligation. If the customer were to terminate the agreement for convenience, they would continue to be obligated to pay us for the monthly fixed charge, but would no longer have any minimum volume commitments, as discussed below.

In addition to the fixed monthly fees to which we are entitled under that agreement, and subsequent amendment, we also receive payments that scale depending on the volume of AI racks integrated and for which we are prepared to integrate. To mitigate the impact of demand fluctuations and supply-chain issues on our growing AI-enabled rack integration business, our primary customer has committed to pay us for maintaining staffing levels to support an agreed minimum weekly quantity of racks. To the extent we do not meet the minimum weekly volume due to our production down time or labor shortages compared to agreed-upon levels, we will reduce the fee, billing only for the quantity of racks we actually configured or could have configured given the actual staffing levels. We contractually agreed to use commercially reasonable efforts to mitigate our customer’s costs for under-utilized staff, including during periods of extended lulls in demand or supply chain issues experienced by our customer. While any reduction in available staff reduces the revenues to which we are entitled under this agreement, we believe our long-term partnership with our customer is strengthened as we help them mitigate a portion of the costs for which they are responsible. The periodic reduction of revenues has a muted impact on our overall results, as we also reduce our labor costs in line with the reduced revenues.

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.

To meet our customers’ evolving requirements for more powerful AI racks and greater cooling capabilities, we invested more in our facility than initially estimated and have increased the electrical power now available in our facility, which substantially increased minimum monthly charges from the local utility provider. From May through December 2025, we were charged a total of approximately $1.5 million of fixed power costs regardless of power actually consumed, plus variable charges for actual power consumption, and are currently incurring monthly fixed power charges of approximately $192,000, plus variable rates for power consumed. We made these additional capital and power investments during the current year with the expectation that they will help us generate greater revenues by increasing volume in future periods.

Among other things, the recent amendment to our long-term agreement allowed us to collect approximately $1.0 million of additional revenues in the fourth quarter of 2025 related to power and infrastructure costs we incurred primarily in the second and third quarters of 2025, but to which we did not previously have a contractual right, so such revenue recognition was deferred until the amendment was signed in December 2025.

Our procurement services involve us procuring third-party hardware, software and services on our customers’ behalf, some of which are then used in our integration services as we integrate those components to deliver a completed system to our customer. Because we are receiving these goods and transforming them, we recognize revenue for the gross value of these transactions and offsetting cost of sales for the components we purchase to fulfill the requests. We refer to these as “gross deals.” In some cases, we also act as an agent and arrange for the purchase of third-party hardware, software or services that are to be provided to our customers by another party and we have no control of the goods or services before they are transferred to the customer. In these instances, we are acting as an agent in the transaction and recognize revenue for only the amount of any fee or commission that we expect to be entitled to after paying the other party for the goods or services provided to the customer. We refer to these as “net deals.” The volume and timing of revenues from our procurement business has been unpredictable and subject to large fluctuations, especially on a quarterly basis. Most transactions are for discrete projects that do not recur, and most jobs are completed within six months.

The 68% increase in procurement revenues, from $117.5 million in 2024 to $197.5 million in 2025, was driven primarily by an increase in purchases from the federal government including several individually large sales, combined with a mix shift with a greater proportion of the revenues coming from gross deals, as opposed to net deals. As much of our procurement business is ultimately related to federal government buying, we believe this can contribute to some seasonality of these revenues. As the federal government budget ends on September 30 each year, we believe this may generally lead to an increase in procurement revenues in the quarter ending September 30 each year and again in the quarter ending December 31 as federal agencies receive their budgets for the new year. However, we cannot accurately predict when other large procurement activity will occur, such as large purchases from our customers’ enterprise clients. Periodic government shutdowns also impact procurement activity. While the military continues to operate during periods of government shutdown, the placement of purchase orders often requires approval by civilian employees of the federal government who do not continue to work during shutdowns. We do not believe this causes a material loss of sales, but rather decreases our ability to predict when such revenues might be realized.

Due to the lighter effort required to execute procurement transactions, the gross margins are thinner in that line of business. As a result, increases and decreases in that business have a smaller impact on our overall margins and profitability compared to increases in the facilities management or systems integration lines of business.

Non-GAAP Revenue, Gross Profit and Gross Margins

The following table presents the results of our procurement activities, 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 analysis of the underlying economics (in thousands, except percentages):

The following table provides a reconciliation of the non-GAAP figures presented above to the most closely related GAAP figures presented. We review these non-GAAP figures not as a substitute for the GAAP figures, but to help 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. We believe presentation of the gross value of procurement revenues is also helpful in forecasting and analyzing bank factoring costs of the related receivables, as the factoring fee is calculated based on the gross value of the transactions.

The gross value of all procurement transactions increased 65% from 2024, from $169.1 million to $278.7 million in 2025. Under net deals we record only our agent fee as revenues, and as the total mix of deals has shifted more towards gross deals, the recorded revenue increased 68% from $117.5 million in 2024 to $197.5 million in 2025. Gross profit recognized on all procurement transactions increased 94% from $7.8 million to $15.2 million. These gross profit figures are exclusive of any related bank factoring charges.

Although the margins are thin, efforts required to support the business are minimal, so any incremental activity remains additive to our net income and can lead to additional cross-sales of higher yielding integration services, so we continue to view this business as a growth vehicle. 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, depreciation of our manufacturing property and equipment, shipping costs, and the costs of support functions such as purchasing, logistics and quality assurance. Our consolidated gross margin was 13% for the year ended December 31, 2025 compared to 15% for 2024. Gross margins for 2025 were 8% for the procurement business, 31% for the system integration business, and 60% for the facility management activities. In 2024, gross margins were 7% for the procurement business, 42% for the systems integration business, and 62% for the facilities management activities.

We anticipate costs to increase in 2026 due to having a full year of operations at our new, larger facility with greater rent and related expenses, paired with an increase in the fees we earn from our primary AI rack integration customer in recognition of our greater expense structure and the recently signed amendment to our AI rack integration agreement. Until we either sublease or find another productive use for our Round Rock facility, we will bear facility rent and related costs at two facilities. The annual cost of rent and related triple-net costs at the Round Rock facility approximate $1.4 million.

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 turnover and 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, 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 these 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.

In prior years, our depreciation related to equipment and other fixed assets used in revenue-generating activities was minimal. Following the significant capital investments recently made in our new Georgetown, Texas integration facility, we began in the current year reporting as a component of cost of revenues the depreciation related to revenue-generating activities. That depreciation classified as cost of revenue amounted to $2.7 million in the current year, with zero reported in the prior year.

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 and equity-based compensation for our executive, administrative and sales and marketing personnel, as well as related travel, selling and marketing expenses, professional fees, facility costs, and insurance. As a percentage of gross profit, SG&A fees increased from 59% in 2024 to 64% in 2025, primarily due to higher non-cash equity-based compensation in the current year. In dollar terms, our SG&A expenses increased by $7.4 million (64%) due to higher non-cash equity based compensation, 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.

Depreciation and Amortization Outside of Cost of Revenues

Depreciation and amortization not allocated to cost of revenues increased from $0.6 million in 2024 to $1.1 million in 2025 in line with the overall growth in the business and the larger Georgetown facility now fully operational.

Bank Factoring Fees

Bank factoring fees increased from $2.7 million in the prior year period to $3.7 million in 2025. As a percentage of recorded revenues, factoring fees improved from 1.8% in 2024 to 1.5% in 2025. However, the basis on which we are charged factoring fees is the gross billings factored, which includes the amount of procurement revenues “netted” out for GAAP-basis procurement revenues, as presented in the table in the Non-GAAP Revenue, Gross Profit and Gross Margins section above. Calculated as a percentage of those gross billings on which we are charged, our bank factoring fees improved from 1.4% in 2024 to 1.1% in 2025. That is due primarily to lower prevailing interest rates in 2025 on which the charges are based, combined with a negotiated one-time $0.3 million reduction of 2025 fees for a bank system issue not expected to recur. During 2025, the bank that factors these receivables encountered a system issue that delayed certain payments to us. In an effort to maintain a good relationship with us, the bank agreed to waive $0.3 million of the factoring fees to which it was otherwise entitled. Excluding the benefit of that negotiated one-time credit which we do not expect to recur in future periods, factoring fees improved from 1.5% of factored billings in 2024 to 1.2% in 2025.

Loss on Sale or Disposal of Assets

As discussed above, we were reimbursed in 2024 approximately $1.7 million to enable our Round Rock facility to integrate AI computer racks for our largest OEM customer, and were amortizing that reimbursement into our systems integration revenues over the estimated three-year useful life of the assets. We were also deprecating the related fixed assets over that same three-year estimated useful life. At December 31, 2025 and following the move to our new integration facility, we determined it is no longer likely we will perform any integration activities in our Round Rock facility, and accordingly that there was no remaining utility to the majority of the reimbursed assets. Therefore, the remaining $0.7 million net book value of the fixed assets was charged as a “loss on sale or disposal of assets” at December 31, 2025. In the same period, we also accelerated recognition of approximately $0.8 million of the related reimbursement which is included in the 2025 systems integration revenues. We do not currently expect any similar loss on sale or disposal or acceleration of reimbursement recognition in future periods. Our Round Rock facility is currently idle, as we seek additional business to utilize the space or to sublease the space if not otherwise used in our operations.

Operating Income

Operating income was $6.3 million in 2025 compared to $5.8 million in 2024. While total operating costs grew 57% and gross profit grew 45%, operating income increased by 10%, or $0.6 million. The lesser growth in operating income was due in part to increased depreciation on the Georgetown facility and an impairment of assets held at the Round Rock facility that are no longer expected to be used.

The 66% growth in total revenues in 2025 compared to 2024, combined with the slight decrease in blended gross margins and $2.7 million of depreciation related to revenue-generation in 2025, drove a 45% increase in gross profit from 2024 to 2025. Net of an increase in operating costs, primarily administrative costs, combined with an increase in bank factoring fees on higher revenues and a loss on disposal of assets that was more than offset by incremental revenues, operating income increased by $0.6 million, or 10% for the full year.

Interest expense

In 2025, we recorded interest expense of $0.7 million related to the bank debt we incurred to finance a portion of the build-out of our new Georgetown facility. We had no such interest expense in 2024, as a smaller amount of debt was outstanding for only a single day in 2024 following signing of the construction loan on December 31, 2024 which converted into a term loan on July 5, 2025.

Interest income

Interest income increased from $0.6 million in 2024 to $1.7 million in 2025 primarily due to the larger cash balances held during the year. The larger cash balance held was driven by the $55.3 million net proceeds we realized from a public offering of our common stock in August 2025 combined with the growth in revenues in 2025. While we incurred additional bank factoring fees related to the increased revenues, the use of that factoring program also accelerates our collection of accounts receivable such that we typically receive payment from our largest customer (via the factoring program) 30-45 days before we are required to pay our vendors, providing us short-term use of incremental working capital on which we earn interest income.

Other expense (income)

In the current period, we recorded $0.2 million of other income, compared to $0.2 million of other expense in 2024. As part of our move to Georgetown, Texas, we negotiated a one-time grant of $0.2 million from the local economic development committee tied to a variety of factors including the signing of a 10-year lease, adding a minimum amount of capital expenditures to that leased facility, and employing a certain number of individuals at a minimum compensation level. In the fourth quarter of 2025, the economic development committee verified our satisfaction of those obligations and paid us the one-time grant of $0.2 million, which was recorded as other income in the current year. We do not expect this credit to recur in future periods. However, in addition to the $0.2 million one-time grant, we also negotiated and were awarded certain tax incentives related to our move to Georgetown. For the next 10 years, the city agreed to reduce by 25% the real property taxes otherwise due on the capital improvements we made to the property, and to reduce buy 50% the taxes otherwise due on tangible personal property. We expect the benefit of these tax abatements will be reflected in future periods in our cost of revenues, where we currently record the majority of our property tax expenses.

Income tax expense

Due to a history of consolidated net operating losses, we had previously recorded a full valuation allowance against our deferred tax asset (“DTA”). The minimal income tax expense recorded in recent periods represented primarily Texas state franchise tax, with any federal taxes offset by a partial utilization of the DTA and related release of the offsetting valuation allowance. In light of our improved financial performance and expectation of continued generation of taxable income in future periods such that we now believe it is more likely than not that we will utilize the majority of our net DTA in future periods, we reversed in the quarter ended December 31, 2025 the majority of the valuation allowance we had previously recorded against our DTA. The small remaining valuation allowance relates primarily to DTAs for state taxes in states in which we no longer generate substantial revenues, such that we expect those state DTAs may expire before we are able to utilize them. Our current year income tax benefit of $7.6 million is comprised of a $7.9 million increase in the net recorded deferred tax asset driven by the release of the valuation allowance, partially offset by $0.3 million of income tax expense related to the current period operations. The tax expense related to current period operations is well below the federal 21% rate that might otherwise be expected primarily due to the immediate deduction allowed for much of the fixed asset additions in the current period as allowed under the “One Big Beautiful Bill Act” enacted in 2025.

Net Income

As a result of our increased operating income, improvements in net interest expense and other income, combined with the release of the valuation allowance on our DTA, net income for the year ended December 31, 2025 was $15.1 million, or $0.56 per diluted share compared to $6.0 million net income, or $0.24 per diluted share in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity on December 31, 2025 are our cash and cash equivalents on hand and projected cash flows from operating activities. In August 2025, we sold 3,450,000 shares under this shelf registration statement for a gross value of $55.7 million ($16.15 per share), resulting in net proceeds to the Company of $55.3 million after deducting $0.4 million of related issuance costs and substantially increasing our available liquidity and capital resources.

As discussed above, we moved to a new facility in 2025 and invested approximately $40 million in capital expenditures to build out that facility, $32.7 million of which was added in 2025. We financed those investments with cash on hand and two related loans from Susser Bank, totaling $25 million. Of that total, $8.7 million was drawn down in 2024, with the remaining $16.3 million borrowed in 2025. In the fourth quarter of 2025, the bank approved us repaying approximately $5 million of the loan balance with previously held restricted cash. Following the initial construction period during which we were required to pay only accrued interest, in July 2025, the loan converted to a fully amortizing term loan with a maturity date roughly approximating the original term of the long-term AI rack integration agreement we signed with our OEM customer in 2024 prior to extending that agreement in 2025. We anticipate receiving funds from our customer that 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 is dedicated to that activity.

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 interest-bearing accounts 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 December 31, 2025, and 2024, we had cash and cash equivalents of $85.5 million and $23.2 million, respectively. Of the cash held at December 31, 2024, $5.0 million was held in a money market account as collateral against our outstanding bank debt and therefore was not immediately accessible other than to use for repayment of the debt. This restriction was released in 2025 and applied as a paydown of the outstanding balance of our debt.

Significant sources and uses of cash

Operating activities:

Cash provided by operating activities was $34.9 million in 2025, compared to $15.3 million of cash provided by operating activities in 2024. This change in cash provided by operating activities is due in large part to the timing of large AI rack integration and procurement deals near the end of 2025 which were not completed and that resulted in a net change in deferred revenues of $10.5 million. The next largest contributor to the growth in 2025 cash flow from operations was the improved net income, net of the non-cash reversal of the valuation allowance on our deferred tax asset, and $6.8 million of tenant improvement funds received from our landlord in November 2025.

The $15.3 million of cash flow from operating activities in 2024 was primarily attributable to the significant increase in contribution from the AI-rack integration services combined with the financial impacts of our procurement services and the large increase in procurement services near the end of 2024 for which we had already been paid under our factoring program but for which we had not yet paid our vendors. Related primarily to the lease for our new integration facility, our operating cash flows in 2024 also reflected large increases in the lease right-of-use asset of $20.2 million, largely offset by an increase in operating lease liabilities of $20.2 million.

Despite the recent improvements in our earnings, financial position and liquidity, there can be no assurance as to the Company’s ability to continue to operate profitably or to scale its business operations on terms upon which additional financing might be available. 

Investing activities:

Investing activities consisted of $32.7 million in 2025 primarily for the buildout of our leased integration facility and headquarters in Georgetown, Texas.

Financing activities:

Financing activities provided a net cash inflow of $60.2 million in 2025 compared to a net inflow of $4.6 million in 2024. In August 2025, we sold 3,450,000 shares of our common stock, netting cash inflows of $55.3 million after transaction costs, significantly increasing funds available to invest in future expansion and growth opportunities. In addition, we also received loan proceeds of $16.3 million to finance a portion of our Georgetown facility build-out. These cash inflows were partially offset by $6.6 million of debt repayments and $4.9 million of cash used to repurchase treasury stock from employees who opted to net-settle the vesting of restricted stock to satisfy tax obligations and the exercise price and tax withholding obligations when exercising stock options in 2025.

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, or our costs may exceed our estimates. Further, our estimates may change, and future events or developments may also affect our estimates. Any of these factors may change our expectations of cash usage during 2026 and beyond or significantly affect our level of liquidity, which may require us to take other measures to raise funds or reduce our operating costs in order 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 impact 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 service our debt including principal payments of $4.0 million scheduled in the coming twelve months plus related interest payments. We also raised additional funds during 2025 in a public offering of our common stock primarily to provide funds that we may invest to further grow or expand our service offerings through either organic and inorganic opportunities, or a combination of both. 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. While we have no immediate plans to do so and there are no assurances that we could issue equity or other securities on terms that are satisfactory to us, we could raise an additional $94.3 million under our currently effective shelf registration statement to fund further growth, acquisitions or other needs.

Off-Balance Sheet Arrangements

As of December 31, 2025 and December 31, 2024, we had no off-balance sheet arrangements.

New Accounting Pronouncements

See Note 1, Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 

Our debt, with an outstanding principal balance of $18.4 million at December 31, 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 $46,000. In the most recent year ended December 31, 2025, this exposure has increased as the outstanding principal balance of the debt has increased from $8.7 million to $18.4 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 $350 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 $187,000.

Item 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

TSS, Inc.

Georgetown, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of TSS, Inc. (the “Company”) as of December 31, 2025, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2025, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Income Taxes – Release of Valuation Allowance related to Deferred Tax Assets

As described in Note 5 to the consolidated financial statements, the Company’s valuation allowance decreased by $8.9 million during the year ended December 31, 2025. Based on the Company’s recent earnings trend and expectations of continuing taxable income, enhanced by signing the extension of the long-term AI rack integration agreement in December 2025, the Company has determined that it is more likely than not that they will realize the tax benefit of its deferred tax assets, with certain limited exceptions. In determining the provision/(benefit) for income taxes, net deferred tax assets, liabilities and valuation allowances, the Company is required to make judgments and estimates related to projections of profitability.

We identified the evaluation of the release of the valuation allowance for certain deferred tax assets as a critical audit matter due to significant judgments as to whether sufficient projected future taxable income will be generated to support the valuation allowance release. Auditing these assumptions involved especially subjective and challenging auditor judgment due to the nature of audit evidence and extent of audit effort required to address these matters, including the use of income tax professionals.

The primary procedures we performed to address this critical audit matter included:

/s/ BDO USA, P.C.

We have served as the Company's auditor since 2025.

Austin, Texas

March 17, 2026

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

TSS, Inc.

Round Rock, TX

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of TSS, Inc. and Subsidiaries (the Company) as of December 31, 2024 and 2023, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

As discussed in Note 1 to the consolidated financial statements, the Company had one customer which accounted for 99% and 96%, respectively, of total revenue for the years ended December 31, 2024, and 2023. Our opinion is not modified with respect to this matter.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Integration Services Revenue Recognition

Critical Audit Matter Description

As described in Note 1 to the consolidated financial statements, management follows the guidance provided in Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), for determining, among other things, when a contract exists, and control of the promised goods or services is transferred in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. In these instances, management identifies the nature of its promised services in the contract and determines when and at what amount(s) revenue should be recognized based on the terms of their contracts. As disclosed, in October 2024, the Company signed a multi-year agreement with its largest customer to provide systems integration services for AI-enabled computer racks at an expected minimum monthly volume. Judgments are used in determining the amount and timing of revenue particularly when determining the transaction price, satisfaction of the performance obligation, and timing of recognition identified under this new contract.

The principal considerations for our determination that performing procedures relating to revenue recognition of this new contract as a critical audit matter are that the application of revenue recognition is complex and it requires management judgment particularly when referring to transaction price, assessing the indicators that management has completed the performance obligation and when to recognize revenue. This in turn led to significant audit judgment and effort in performing procedures to evaluate the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included gaining an understanding of controls around management’s evaluation of this new customer contract. These procedures also included, among others, obtaining and evaluating the new contract and related amendments, testing the reasonableness of management’s assessment of the indicators of completion of the performance obligation, testing management’s calculations for how and when revenue should be recognized based on volume commitments and the underlying data which was used in the calculations, where applicable, and considering whether these conclusions were consistent with evidence obtained in other areas of the audit.

/s/ WEAVER AND TIDWELL, L.L.P.

We have served as the Company’s auditors since 2015.

Fort Worth, Texas

April 15, 2025

TSS, Inc.

Consolidated Balance Sheets

(in ’000 except per-share amounts)

See accompanying notes to consolidated financial statements.

TSS, Inc.

Consolidated Statements of Operations

(in ’000 except per-share amounts)

See accompanying notes to consolidated financial statements.

TSS, Inc.

Consolidated Statements of Changes in Stockholders’ Equity 

(in ‘000)

See accompanying notes to consolidated financial statements.

TSS, Inc.

Consolidated Statements of Cash Flows

(in ’000)